Strong Eagle wrote:I am not sure what you mean by "2 nos." but I'll tell you what I know.
<snipped<
3. You get into a real grey area when a director takes a company loan. It is legal but must follow guidelines. But, why would you want to do this? If it is a loan you will eventually need to pay it back. But see also my next answer.
4. It is perfectly normal and legal to have your paid up capital consumed by salaries and expenses. Instead of a loan to a director, you could pay out director's fees.
Here is an example of how it works.
Balance sheet - beginning of year
Assets
Cash in Bank - $100,000
Liabilities & Net Worth
Paid Up Capital - $100,000
P&L for the year
Income
From operations - $0
Expenses
Directors fees paid - $50,000
Net profit - -$50,000
Balance sheet - end of year
Assets
Cash in Bank - $50,000 ($50,000 was paid to director)
Liabilities & Net Worth
Paid Up Capital - $100,000
Retained earnings this period -$50,000
Total liabilities and net worth - $50,000
You can see that your net worth account is reduced whenever you make a loss, and you make a loss whenever your expenses exceed your income.
There is nothing that prevents you from paying directors fees even when you make a loss.
Hope this helps.
Strong Eagle wrote:Paid up capital is mostly a red herring and meaningless in evaluating the financial condition of a company.
Extreme example 1: I put 2 million USD into a Singapore company... that's SGD 2.7 million. The balance sheet is simple... 2.7 million in cash in the bank, 0 in liabilities, 2.7 million in net worth.
I immediately pay myself a bonus on SGD 2 million. Reduce cash by 2 million, expense 2 million in bonues. Now, I have an income statement with 0 revenue, 2 million in expense, net loss of 2 million, applied to the capital account, and a networth of 700K... but I still have paid up capital of 2.7 million. Does paid up capital tell you anything? No?
Or... instead of the above scenario, three directors each loan themselves 800K, Now, cash is drained by 2.4 million but there is now a new asset, loans due for 2.4 million, so there is no change in net worth... 2.7 million... but in reality, there's only 300K cash in the bank and a rather questionable set of receivables. Of course, paid up capital is still 2.7 million... so once again, it's a meaningless number.
You really need to see 3 to 5 years of financial statements. What is the operating loss/revenue? What is expense ratio against revenue? Where are the expenses allocated? Big salaries? Bonuses? Payments to vendors?
What about the balance sheet? What is the cash and relatively liquid securities situation? This is what really matters to you... do they have the money? Are the revenues from the income statement sufficient to keep the money rolling in?
What is the quality of non cash assets? Company can look good but if loans are not collectible, if valuations of intellectual property are excessive, then its all bullshit.
How large are the liabilities with respect to assets?
Bottom line... if they are willing to open the financial kimono then maybe you can make a great decision... but paid up capital is a useless metric.
The reality, though, is that if you were to go to work for my company, I'd tell you to f*ck off if you wanted to see my financials. I'm straight up about my revenues and expenses. I'm straight up about the risks you take on, and part of the compensation package I'm willing to give you is in part to incorporate those risks. I can guarantee nothing... I might fail... I can only say that I have a deal working, I need you to make the deal work, we both profit if the deal works, and we're both f*cked if it falls apart.
Most important to you, then, is to assess the integrity of the people offering the job... that's really all there is in small business.
Great line, Sporkin. Gonna have to use that one.sundaymorningstaple wrote:Sporkin,
"That's life i suppose, you can't control when opportunity knocks, it just depends on your state of undress as to whether you can answer the door."
Well said.
sundaymorningstaple wrote:Sporkin,
"That's life i suppose, you can't control when opportunity knocks, it just depends on your state of undress as to whether you can answer the door."
Well said.
Strong Eagle wrote:It is indeed the level of risk that you can stomach that matters. If you need a guaranteed revenue stream then more traditional employment is the answer.
If 5 guys have ponied up 2 million USD, I'd guess they would be serious about trying to make things work, and I'd say the possibility of shenanigans would be low. There's not much to be gained to putting money in a company, then loaning it back, except for Thailand, and on paper, where a million Baht is required for a work permit.
OTOH, it is a startup, and there are risks that need to be evaluated. When I started my company with my biz partner, he had a Rolodex of business associates as large as Batam Island... our chances of gaining business were good. And, we hired other expats who had started their own businesses, only to discover that without that big Rolodex, it was impossible to get work.
If the opportunity/salary they were offering was really good, then I'd explore their business plan with them in detail... the markets, the sales plan, gross margins, etc, as opposed to financials. You can find out if their plans for spending 2 million to make even more are realistic, and maybe you do want to be part of that game.
sundaymorningstaple wrote:Everybody has at least one epiphany moment and it should be acknowledged when it happens!![]()
Seriously, a proper wordsmith couldn't have done it better I don't think.
Users browsing this forum: No registered users and 3 guests