Reply to: Paying out dividends after posting a loss

[Clare@InTouch]

I thought MF's post had <sarcasm></sarcasm> tags on it.....

Oops - Friday afternoons are obviously a "sarcasm goes right over my head, where's the pub" moment

[Spoiler]

Your bookkeeper needs some basic lessons on the "accrual principle".

Don't think it's the bookkeeper that needs basic lessons, more likely it's me.

[Scruff]

Your bookkeeper needs some basic lessons on the "accrual principle".

The profit that you make is not related to the cash you receive, in that your invoices which are dated within your financial year end should be included in that year's Profit & Loss. The fact that your customer hasn't yet paid for them, does not affect the Profit & Loss, unless the customer is never going to pay for them (ie. you have incurred a bad debt, which is not recoverable).

If these invoices would make your company (net) profitable, once your bookkeeper has processed the accrued invoices, then you can "legally" provide for the Dividend(s).

IANAL but an IT Consultant (and a "lapsed accountant").

MEH...

[Spoiler]

No problem, it's what I do....

But I'd kinda worked out you weren't talking about the usual BoS Limited and was basically asking why you were looking to pay out money to shareholders (who, I have to assume, are not net contributors and possibly not on the payroll) when you don't have any to pay out. Difficult to give any meaningful advice when you only have half the story to work with...

Indeed. I had only bothered to find out (less than) half the story last week and just wanted to understand a very basic accounting question. It seems we made a call regarding placing an order for products and extending payment terms to customers and didn't fully appreciate the impact that would have on other things, such as getting cash out. Lesson learnt.

[malvolio]

I'm well aware that the advice you offer on here is well founded and relevent. But it's the typical sarcastic delivery that made me skip it this time.

No problem, it's what I do....

But I'd kinda worked out you weren't talking about the usual BoS Limited and was basically asking why you were looking to pay out money to shareholders (who, I have to assume, are not net contributors and possibly not on the payroll) when you don't have any to pay out. Difficult to give any meaningful advice when you only have half the story to work with...

[Spoiler]

I would say that is the best route for you to go just to avoid any mess you will get yourself into. Your financial affairs, understanding of them and planning of them sound like a right mess there.

It's not as bad as I'm making out. Although I am mainly clueless, we use a bookkeeper to do our monthly stuff, including P&L reports, etc. and an accountant for year end. And another shareholder in the firm pays much more attention to our financial position than i do. I just tend to get involved when it's something that interests me - such as getting paid.

We are not a normal bums on seat type Ltd. We're reselling products (hardware) and also supplying services (consultancy, training, support). A brief glance over the weekend shows the loss at the end of last year was down to a few orders we processed for a customers which we haven't got paid for yet. Will take a closer look today as to how much the defecit is...

[Spoiler]

Very professional. Good to know for future reference you can take straight advice. But hey, it's your court case...

I'm well aware that the advice you offer on here is well founded and relevent. But it's the typical sarcastic delivery that made me skip it this time.

[northernladuk]

That's a good point - if it's short term then a loan can be fine, you just have to be careful of the tax implications if it goes over £5,000 or past your year end. And of course you have to pay it back.

I thought MF's post had <sarcasm></sarcasm> tags on it.....

[Clare@InTouch]

Take some out as a directors loan. You know is makes sense.

That's a good point - if it's short term then a loan can be fine, you just have to be careful of the tax implications if it goes over £5,000 or past your year end. And of course you have to pay it back.

[malvolio]

Meh.

Very professional. Good to know for future reference you can take straight advice. But hey, it's your court case...

[MarillionFan]

Meh.

Take some out as a directors loan. You know is makes sense.

[northernladuk]

Looking for some enlightenment and education ...

Out Ltd is looking to start paying out some cash to 2 shareholders, so initially I thought we'd just go the usual dividend route.

However, at the end of our financial year 1 (just finished) it looks like we will have posted a loss.

How does a contractor post a loss? I presume you are not a standard contractor bum on seat setup? Have you been paying yourselves dividends last year as well? Doesn't sound like a very good situation at all that. I would also be concerned you only knew you were posting a loss AFTER you year end.

Now in FY2 we will have some cash in the business that we'll want to pay ourselves with come October. I think this means the pre tax profit will need to be high enough to cover the corporation tax, the dividend paid and the loss from the previous year.

You only think you will?

Perhaps for now it may just be easier to pay out money as standard salary and not bother with dividends?

I would say that is the best route for you to go just to avoid any mess you will get yourself into. Your financial affairs, understanding of them and planning of them sound like a right mess there.

[Spoiler]

If you don't know that dividends are paid out of net profits, I think perhaps you should be doing some reading. How much else don't you know that is quite important like, just as a random example, what is "net profit"?

Meh.

[malvolio]

Thanks, I think this was the bit I hadn't planned for - so essentially we need to make up the loss first (so we're back to zero), then make some more profit out of which we can pay dividends (tucking away the relevant corporation tax bit). Is that right ?

If you don't know that dividends are paid out of net profits, I think perhaps you should be doing some reading. How much else don't you know that is quite important like, just as a random example, what is "net profit"?

[Spoiler]

In order to pay a legal dividend the company should have enough profit, and that's retained profit - so the loss brought forward has to be covered by current year profits. Your accountant should be able to provide management accounts so you check the current position.

Thanks, I think this was the bit I hadn't planned for - so essentially we need to make up the loss first (so we're back to zero), then make some more profit out of which we can pay dividends (tucking away the relevant corporation tax bit). Is that right ?