Advice on restructuring small service based business

[the business bee]

I hope I'm posting in the right place! I am hoping for some advice on how to reorganise my business in order to increase profitability, and ensure we remain solvent. We are a service based business (think cleaning company) with very low costs outside maintaining our vehicle fleet and paying staff wages.

Covid ran like a tornado through the business, we closed for the initial lockdown but then customers were very slow to return. In contrast the 21/22 financial year has been incredibly good, and forecast is good in terms of turnover.

The issue is that we have now got 3 years of losses in our accounts - the first two years were losses due to heavy investment into the business (purchasing the vehicles), and then the last obviously was due to Covid. We did get a bounce back loan last April, and the team were furloughed, but aside from this we have not been eligible for any support.

The main challenge I am facing is repaying the debt we weren't able to service last year due to reduced turnover, and also avoiding VAT registration. We were VAT registered for one year but deregistered in July 2020 - the VAT payments were crippling us. As we're service based we can't claim back VAT on anything significant, nor can we pass the charge on to customers without pricing ourselves out of the market. Therefore remaining under the VAT threshold is a major concern.

Currently I am director of the business, and we have 9 part time employees. Total monthly wage bill varies, but is usually around £6,000-£6,5000. Turnover for April was £8,000, May £9,200 and June £10,100. Turnover is forecasted to stay at around £10,000 with some minor dips in August and December (as in previous years) due to less demand from customers.

I usually take a small wage but due to the stretched finances haven't taken a salary for some time. I have made numerous loans to the business to keep things afloat, but something needs to change in order to turn things around.

I'm looking at all options an would welcome any input/suggestions/advice. I know this is a good business with a solid workforce, customer base and reputation. Is there a way to reorganise things to ensure survival - perhaps having staff as contractors, dividing work up and making them franchises? I have a legal background so whilst rusty I do have some understanding of the options.

Many thanks in advance, from a desperate but optimistic small business owner.

 

[CA85]

Difficult to answer without much more info. But my thoughts:

If sales are £10k per month you will need to register for VAT. Are your customers - businesses or individuals?
What are the vehicle costs per month, are you profitable at £10k sale per month?
Can you target vat registered businesses so that you are not taking the hit for VAT?
Rather than trying to stay smaller, could you try and get bigger - can you increase turnover without increasing your debt/financing? eg increase prices, fill "dead" time with new work.
Franchising - would this be effectively be hiring out branded vehicles? how geographically spread are you?
Merge/sell out/partner up with competitor?

 

[the business bee]

Difficult to answer without much more info. But my thoughts:

If sales are £10k per month you will need to register for VAT. Are your customers - businesses or individuals?
What are the vehicle costs per month, are you profitable at £10k sale per month?
Can you target vat registered businesses so that you are not taking the hit for VAT?
Rather than trying to stay smaller, could you try and get bigger - can you increase turnover without increasing your debt/financing? eg increase prices, fill "dead" time with new work.
Franchising - would this be effectively be hiring out branded vehicles? how geographically spread are you?
Merge/sell out/partner up with competitor?

Thank you for your reply! Our customers are all individuals, so cannot pass on the VAT rate. We are under the 12 month threshold currently but this is going to change in the next month or two, hence me considering our options.
We did try and get bigger, which stalled for a number of reasons and contributed to the poor financial position of the business prior to Covid - our business just doesn't work if we have to pay out for VAT as it's £1500+ per month we have to pay in return for nothing.
We're within around a 10 mile radius of one particular area.

 

[mattk]

Is your business model even viable?

Suggesting you need to stay under the VAT threshold to prevent yourself from becoming uncompetitive is a red flag. Similarly, do you really need vehicles for consumer cleaning? All the domestic cleaners I know use their own cars. IMO fancy tricks to avoid VAT, such as franchises, wouldn't allow me to sleep at night, but that's for you to decide.

I think you need to get back to basics. Does the company wash its face on paper? If not, you might be barking up the wrong tree.

 

[the business bee]

Is your business model even viable?

Suggesting you need to stay under the VAT threshold to prevent yourself from becoming uncompetitive is a red flag. Similarly, do you really need vehicles for consumer cleaning? All the domestic cleaners I know use their own cars. IMO fancy tricks to avoid VAT, such as franchises, wouldn't allow me to sleep at night, but that's for you to decide.

I think you need to get back to basics. Does the company wash its face on paper? If not, you might be barking up the wrong tree.

Viability is exactly what I'm looking at here. We are professional dog walkers, which does require vehicles. In my experience speaking to other similar business owners, the VAT threshold is a massive issue as it applies without exception even to industries such as ours where there is no benefit or real reason to justify it. There are very few businesses the same size as mine, and next to none that are larger in the UK precisely because the VAT payments then make the business unsustainable due to the added expense.

I have absolutely no idea what this means: "Does the company wash its face on paper? If not, you might be barking up the wrong tree." - please could you explain?

 

[Financial-Modeller]

It sounds like you are charging your staff at cost, leaving very little for vehicles, materials, etc and profit.

You need to increase what you're charging, or decrease what you're spending. Or you need to look at upselling or adding value to your customers - dog food, toys, etc


Edited because you have changed from a cleaning company to a dog walker now!

 

[mattk]

I have absolutely no idea what this means: "Does the company wash its face on paper? If not, you might be barking up the wrong tree." - please could you explain?

How much do you want to earn? Let's say £50k. It is even possible for your current business model to generate £30k in salary (with the associated costs) plus £20k in dividends?

How many customers would you need and how much would they need to pay? Could this be achieved while staying under the VAT threshold?

It might be that dog walking is actually a poor business model and that despite lots of people wanting their dogs walked, the low barriers to entry means prices will always be low and therefore profits minimal.

 

[SillyBill]

The numbers read to me like the best decision is to sack off all the staff and get on the tools, take the most profitable, easiest customers and service them yourself. You will be taking a wage home then next month. I am not convinced of the scalability of some of these businesses that rely on personal service and barrier to entry being so low a cap on price you can charge, yes it can be scaled and some do but for most it is a service which lends itself to a one man band. Perhaps this may dent your ego somewhat (we all have one) but sometimes the best step forward is to go smaller. Chasing revenue and staff numbers in your game is a fool's errand IMO, you ain't making profit so reverse course.

 

[Scottishgifts4u]

I live in a growing town and to be honest you can’t throw a stick down the street without hitting a dog walker.

The thing is they are all individuals or at the very most with one other employee i.e 2 vans at most.

6 dogs max each ‘walk’ @ £10 per dog x 2 groups per day x 5 days = £31k per year.

I’m with the poster above that is sceptical that this can be scaled up to make it profitable without increasing prices and making you uncompetitive.

 

[Lisa Thomas]

'Wash its face' means to break even- i.e make enough money to pay the liabilities.

If you can't make the changes needed trade through the cashflow problems and recover then you may need to consider an insolvency procedure.

A CVA might be viable, giving the company some breathing space.

 

[Paul Kelly ICHYB]

@the business bee when you did your business plan, didn't you look at the variable in relation to costs, turnover etc.

I know this is too late, but buying your vehicles may have just been your first mistake as you have a chain around your neck, however, selling them now may recoup some of your investment. If they were leased, the VAT could have offset the sales tax you will have to charge if going over the VAT threshold.

'I do not want to go over £85k because I have to register for VAT', especially where there is more than one person involved in the business (especially employees) is something I am always sad to hear. Registering for VAT, although normally unwelcome, is a sign that your business is doing well and growing. Using this as a barrier to growth shows narrowmindedness and an unwillingness to plan for growth and increasing success!

As suggested, ditching the current structure and doing it yourself (or with one other person, maybe two) may be a good idea, however, it depends on what your charge and how many dogs you can sign up.

 

[Mr D]

It sounds like the VAT threshold problem is a trap for you. Once you approach it in a rolling 12 month period - what then? Cease trade for a couple of months? That presumably would not be viable.

Reduce your business - then you can trade nicely until such time as government reduces VAT threshold.
It also as has been said sounds like you are pricing too cheap, hence costs are high compared to turnover.

Certainly I know dog walkers who can make their business work. Scaling up appears to be the problem, little benefit from scale as your business has to remain small to be under threshold.

 

[CA85]

If there are no businesses doing it on a bigger scale, does this suggest that this type of business can't be scaled up successfully. As identified, by having to charge vat, you become more expensive, and then customers will just move towards cheaper (non-vat) alternatives, of which there is a plentiful supply.

When you run the numbers - how much do you want to earn from this, and if you trade below the vat threshold can you achieve this?

What about diversifying into pet food/toys, dog grooming? Can you offer any other pet related services beyond dog walking?

 

[Stuart_Walker]

As other posters have pointed out, it looks like your margins are too thin to allow scale.

If most walkers are individuals why are you giving staff vans? (incidentally do they take them home and if so are you accounting for the benefit?).

You can't split the business under common control and hope that this avoids VAT. I promise you HMRC have seen it all before.

Your choice is to make it worthwhile for people to pay a higher price that includes the VAT or reduce your outlay so that the lower sales value adequately covers your costs.

Welcome to business strategy!

 

[Stas Lawicki]

Your staff bill is around £70k, vans, equipment, admin, others costs will mean you need to earn over the threshold to keep open.

You don't pay VAT, you collect it. On the right scheme, you may well benefit from this much more than you realise.

There are numerous things you can do but it does depend on what you're prepared to do yourself, what you want from the business and what you market will support.

It's a nuanced issue so all I will say is, look at different vat schemes, don't be afraid of it and if you really want to stick below it (and many business owners do), start from scratch with a paper and pen, draw out a plan based on your own figures and see where you get to.

 

[CA85]

Under the flat rate scheme for vat, I think a dog walker would be a "limited cost trader" which is 16.5%.