Window dressing, what is that about? That is about dressing up your annual report.
Window dressing is something shops will recognize. It is all about making your product so attractive, a potential client needs to come into your shop. That is the first step to persuading that potential client to become a true client.
The official translation is ‘making it more attractive than it actually is’. Or ‘fake it till you make it’.
Having a company and getting a loan is always a hassle. The annual report and income tax returns over the past few years are examined by a banker. A banker is not a tax expert, hence you get sometimes questions about a tax return, while the tax office already agreed with the tax returns.
The question of questions you do not want to get is: why has the company negative equity?
What is company equity?
A company has at the end of the year a balance. To get it to balance, the entrepreneurs equity in the company is used for that purpose.
Example, the company has only a EUR 10.000 bank account. That is on the debit side. Hence on the credit side is EUR 10.000 equity entrepreneur. Credit side is the good side in this perspective.
But if you had EUR 10.000 in the bank, you paid EUR 8.000 creditors, so you have EUR 2.000 in the bank, but still EUR 4.000 creditors to pay. Then the equity of the entrepreneur is EUR 2000 on the debit side. To balance it out. But that is negative equity, as the company equity should be on the credit side.
Is negative equity a problem?
It depends who you ask.
If you ask the entrepreneur, of course not. The entrepreneur knows he or she can soon invoice the clients. Money coming in, to pay creditors, but also to pay rent and groceries.
If you ask the bank, it is a problem. Negative equity is a no for a loan. For us that is a bit strange, as this is only a mathematical approach. Not the approach of the actual company process. But then again, a bank needs to draw a line and the line is negative equity.
How to avoid negative equity?
The one moment both the bank and the tax office take into consideration is January 1. If you are aware of this date, you can work with this date.
For instance, the Dutch tax office accepts that you bring in money in the company from private bank accounts. This helps your company equity wise, but at the same time you avoid paying Box 3 wealth tax in the income tax return. As the tax office does not want you to misuse this possibility, the amount you can bring in is maxed at about EUR 40.000. Depending on the company situation.
The court, on the other hand, accepted EUR 150.000 brought in by a lawyer. Hence it depends on the purpose and the arguments you bring to the table. Lawyers are good at that.
The more you can transfer from your private account to the business account, the better it is for the equity of the company.
The moment you see January 1 approaching, you remind your outstanding debtors. The more they pay, the more is in the bank. As debtors and the bank balance are on the same side of the balance, you would think that does not make a difference. Still it does.
The bank also makes ratio calculations where the debts are set off against receivables. Then it helps that with the money collected from the debtors, you were able to settle some creditors. Good for ratio calculations made by the bank.
When to start with paying attention to the content of your annual overview?
Instantly of course, but we do understand not everybody is excited about tax and accounting. A loan we have in mind with this article, is one to purchase a home. A home purchase is not like purchasing a Mars bar, you actually give it some thoughts. Maybe well ahead of the actual purchase. That is the moment.
The moment needs to be at least three years before you need to documentation in order, as the bank will request for the last three years.
Do not fake it, make it
Even better than window dressing is simply make it happen. If you are aware you want to purchase a home. And you see how expensive matters are on the housing market. Use the max of your ability to make your company a success. The home purchase is your drive. Drive can bring your more than you ever could expect. Overdrive, a burn out or similar issues, brings you nothing. So have your personal balance also up to date!
Tax is exciting
We think tax is exciting. Discussing an annual report with the bank is never exciting. More frightening, and they know! The bank knows you want that loan, so it is also part of a play. Play it well, organize matters before you start the adventure.