Preparing the annual activity report of your company is one of the activities that we include for free in our services if you’ve been with us for that fiscal year. It is also the most demanding procedure required for the correct accounting and bookkeeping of your company.
What’s inside that annual report? It’s a collection of all fiscal elements that defined the activity of your company in that fiscal year. It must contain everything, from your invoices, documents, and bank movements to taxes paid, VAT, etc. That’s the reason why we ask for any missing information when we start preparing it at the beginning of the following year.
An essential part of the process is analyzing if the company experienced profit during that financial year or, on the contrary, lose money and ended the year in negative numbers.
How did this happen?
Companies experience losses more often than you may think. It’s not uncommon for startups, for example, to show negative numbers during their first years of existence. It’s not unusual for the members of a company to finance the business during the first months or even years, when there’s barely any profit, from their personal funds.
This is usually done in the form of personal loans from the individual to the company.
When there are losses…
If the numbers are positive, that’s good. Your company can reinvest that money (keep it) or can distribute profit (in form of dividends). However, experiencing losses is problematic for an important reason: it means your company is in a bankruptcy situation. Such an outcome can have ugly consequences including the closure of the company.
What can we do in that scenario? Well, let’s have a look…
Did the company catch up?
Sometimes, your company closes the financial year with losses, but then money starts flowing in, and by the time the annual report is going to be prepared and submitted, everything is ok. The company has now a positive cash flow and has avoided the bankruptcy scenario.
In that situation, you don’t need to worry. We will declare that the company had a period of losses but the cash flow is not positive, so no further action is required.
If the company is still in negative numbers…
However, if the company is still showing losses, there are three things that can be done.
Refinance the company by increasing the share capital
Imagine that your company ended up the financial year with 3,000€ in debt. One solution to turn this situation around is to refinance the company by increasing its share capital. So if your company is you and your friend Jane, and both of you are shareholders owning 50% of the shares, you can increase the share capital by 3,000€, paying 1,500€ each, to avoid the bankruptcy setup.
This can be done online. You will need to pay this extra contribution, get a signed statement of this share capital contribution payment from the bank, and proceed to increase the share capital of the company in the registry as shown in this article.
Declare the expenditure as intangible expenses
Many times, when a company is starting, it invests a lot in intangible assets, such as work from subcontractors or development or design costs related to the website, technological platform of the company, or infrastructure.
If the bulk of expenses of your company, the ones causing the bankruptcy situation, fall into this category, you can claim that the negative numbers are due to intangible assets. This represents an investment in the company and, as such, it’s not money “lost”, but “invested”.
In that situation, then, you can sign a document claiming that your expenses fall into any of these categories, including the necessary documents (invoices, receipts, etc) to justify them, and you want to declare them as intangible assets of the company, reverting the bankruptcy situation.
What can be considered an intangible asset? Some examples include:
- Design costs for the brand, corporate image, or technological platform
- Development costs for the website, application, or technological platform
- Subcontractor work on the platforms or infrastructure of the company
- Software acquisition costs for the infrastructure or technological platform of the company
- Acquisition of laptops and hardware devices required by the company
- Maintainance costs for the infrastructure or technological platform of the company
All you need to do is digitally sign a document containing a specification of these intangible assets. We have a template you can use. You just need to add the description and cost of the elements that are considered intangible assets and sign it.
As we mentioned before, the initial funds of a young company usually come from its members. They make personal loans to support the company with their own money.
If the company is still experiencing losses at the time of preparation of the annual report, the members have the option of waiving this debt. This should be considered the last resort. Why? Because after members waive this debt, they have no way of getting back their investment except in the form of profit. That means that instead of just getting back the money they invested through a personal loan to the company, they need to get dividends or salaries later when the company is no longer in negative numbers.
Sometimes, however, this is the only option available to the members of the company. If you decide that this is the best option for you, you will need to fill in and digitally sign a waiver document where all the members will state that they waive this money. We’ll be happy to share a template of that document ready for you to fill in and sign.
Experiencing losses during a fiscal year is more common than it seems. If this happens, it’s important to get away from the bankruptcy scenario by taking the company back to positive numbers. In this article, we talk about the different options to do so, alongside their repercussions and requirements.