The Unsure Entrepreneur

The Unsure Entrepreneur - Daryl Ching

SUMMARY KEYWORDS
Entrepreneurship, financial statements, accounting services, capital raising, succession planning, tax minimization, profit maximization, financial literacy, CFO services, bookkeeping, expense management, business growth, investment advice, financial planning, startup challenges.

SPEAKERS
Daryl Ching, Roger Pierce

Daryl Ching 00:00
We should be doing this all the time, whether it's once a quarter, whether it's twice a year, of just doing a review saying, you know, our companies has evolved. Does this expense structure still make sense based on how much our business has changed today.

Intro 00:14
You're listening to the Unsure Entrepreneur Podcast with Roger Pierce, whether you're scribbling business ideas on a napkin or wrestling with the should I shouldn't I question. Get ready to explore the realities, the risks and the rewards of entrepreneurship as we share the stories, scars and successes of small business owners.

Roger Pierce 00:35
Hey, entrepreneurs, thanks for tuning in. Now, if you worry about the numbers like I do, take a deep breath and relax, because my guest today has you covered. Daryl Ching is a chartered financial analyst and the managing partner at vistance Capital advisory. His firm specializes in full service accounting services, including raising capital. CFO services, mergers and acquisitions and even succession planning, a very hot topic for entrepreneurs right now, with 10 years in investment banking and another decade in executive roles at small businesses, Daryl has been on both sides of the equation, giving him a rare perspective on how investors assess risk and reward and what business owners need to do to attract funding. Now, Daryl's insights have been featured on BNN Bloomberg The Globe and Mail and the financial boast making him a go to expert for Small Business Finance. Welcome Daryl.

Thank you, Roger. I'm really happy to be here.

I'm excited to dig into your knowledge and shed some light on money and numbers and all that good stuff. But before we get to that, can you add to my bio and maybe in your own words, describe what you do for entrepreneurs?

Daryl Ching 01:48
Sure you mentioned the capital raising part, and that's really how the company started. We were doing series A equity financing for small business, raising three to $10 million while I was doing that, within a couple of years, I realized that a lot of my deals were falling apart because my clients had terrible financial statements, and so I started looking into what was going on, and a lot of my clients had a bookkeeper and they had an accountant show up once a year to file their taxes and do a notice to read or financial statement. Now the issue with that is, and a lot of people don't realize it, your financial statements in that arrangement are probably inaccurate because the bookkeeper doesn't know to ask certain questions that are important to make sure your balance sheet is accurate, and your accountant likely will not take time to ask you questions, because during tax season, they're churning through financial statements so quickly that they just want to get them done, and they'll likely just take what you give them, put them into a t2 and file, and then they're done.

So a lot of entrepreneurs are not aware that their financial statements are not accurate in this type of arrangement. So this is why I got into accounting. I wanted to help small businesses ensure that their financial statements are accurate so that we're able to maximize profit through doing different calculations. And we're helping our clients look forward so that they can plan, budget and forecast, because this is generally not available when you're working with a bookkeeper, an accountant. So this is, you know, our difference maker, and this, this is what makes us unique.

Roger Pierce
So let's roll around in the money tax time is coming up, but I know entrepreneurs hate paying tax, and so let's, let's continue on our conversation about that, what's the stat I had here? Time savings. This one caught my attention, engaging an external accountant or bookkeeper saved businesses on average, 9.1 hours per week, which allows owners to focus more on operations and sales. A recent survey revealed that 98% of small business owners felt their accountant boosted their confidence in managing their business, and nine in 10 stated their accounting professional contributed to their business's success. So how's that for a glowing endorsement?

Daryl Ching 03:53
I like it. And Roger, I think the one key point you hit was opportunity costs, especially when I'm working with much smaller businesses. I have owners that say, Well, I know how to do the accounting. I know how to do the bookkeeping, so I'll just do it myself. And the question that I like to ask is, okay, well, if we were to take that off your hands and save you, call it 10 hours a week, what could you do with that 10 hours? Could you do sales and bring in a new client? Could you take some time to build strategy within your business, improve your vision, and could your business be growing much faster just by outsourcing it? Because at the end of the day, for a firm like ours, we are structured with fees that match the type of services. So if you ask for bookkeeping, we charge $50 an hour. If you ask for more managerial services, it could get up to $150 an hour, but we are taking a lot of that work off your hands, and we're probably doing it faster than you can, because this is all we do. So the question becomes, from a time saving perspective, is it worth it? From an opportunity perspective, to pay some small fees just to get it off your plate? I hate numbers.

Roger Pierce 05:00
I'm a Marketing I'm a sales guy.I hate numbers. I'm a firm believer in what you just said. Play to your strengths and delegate your weaknesses.

Daryl Ching 05:05
Now let me go one step further, Roger. I think an accountant is particularly helpful if they are able to get you your monthly financial statements on time. So let's just call it the 15th of the following month, every month and they're able to capture KPIs help you capture gross margins. Make sure that you have an accurate profit and loss statement, so that the profit is accurate every month. That is real value add, because now you've got information to make decisions. So as you are running your business, if you have questions like, can I afford to hire a salesperson? Okay, if I raise capital, which product line should I be putting my resources into? Do I even need to raise capital based on the plan that I have? These questions are very difficult to answer. If your accountant is six months behind on your books, you laugh, but it is very common when I talk to a lot of companies and ask them about their accounting and I say, can I see your monthly financials, they often say, my accountant is six months behind, to which I say, well, then how are you making decisions? And they say, Well, I'm making them based on gut. That's what a lot of entrepreneurs are doing, because they don't get service they need.

Roger Pierce 06:12
To your point, how do you make good decisions in real time if you don't know where the heck you stand financially?

Daryl Ching 06:18
That's one of the things that happens a lot, they say, Can you help me with projections? And the answer I give that they don't like is, it's very difficult for me to consult and give you advice. If I can't see where you're at, that's the right answer, as long as you minimize the time. Because I always ask, what's the best use of an entrepreneur's time? And often it is not even doing that, but if it's taking less than an hour a day just to upload some receipts, then yeah, no harm, no foul.

Roger Pierce 06:47
That's a good point. So maybe you can differentiate for people, a bookkeeper service and an accountant.

Daryl Ching 06:53
Right now, our firm does not employ any bookkeepers. Everyone is either an accountant or studying accounting, and here's the reason why I found that in my experience working with bookkeepers, and this is just my opinion, because a lot of companies do work with bookkeepers, that bookkeepers know how to do a lot of the basic entries of entering invoices and doing expenses, but what happens is an accountant will have to come and do a lot of adjustments to fix a lot of the issues, because the bookkeepers just don't understand a lot of the basic principles of accounting to get to accrual based accounting, I'll give you an example. Let's just say, for the sake of argument, that you employed a lawyer, and you got legal services in January, February, March, and you didn't pay your legal bill until April. The bookkeeper is likely to input that entire legal expense into the month of April. An experienced accountant knows that even though the cash was paid in April, I should be allocating legal expenses to January, February and March, because that reflects Profit and Loss accurately. And so an accountant will likely have to come in and fix all those mistakes anyway. So from our perspective, it's faster just to have somebody with that's well versed and understands accounting to do the work than to have the bookkeeper do it and have it to be fixed later. And this is important for any company that wants accurate financial statements.

Roger Pierce 08:12
And how important is accounting software in all this?

Daryl Ching 08:16
Well, crucial, and for a lot of small businesses at the startup phase, a lot of the basic services like QuickBooks and Xero are fine. It makes sense to migrate to better accounting software when the business gets more complex. So if you're a business that manufactures and you have raw materials and you have work in progress and you have finished goods, you're going to need a more complex accounting system. If you deal in multiple countries with multiple currencies. Sometimes at that point, QuickBooks is not going to be enough. You're going to have to get a more complicated software. So the trigger point for when you kind of evolve beyond a basic software depends on the complexity of your business, and you mentioned some good ones.

Roger Pierce 08:55
Shameless shout out to my longtime client, sage accounting software, been doing work with them on the content side for about 10 years. And to your point, they've got a very basic, they all do very basic starter package. Then, you know, get up right up to ERP systems for sophisticated businesses that are dealing with international currencies and foreign exchange rates and multiple entities, all that stuff. So there's a solution out there, and your accountant can be a source of recommendations too, right? Absolutely.

Daryl Ching 09:22
And we have a number of clients that use Sage, and sage does provide that ability to for you to evolve into newer packages, into more complex packages, depending on what is required in your business. But we are certainly in a great position to recommend them, because, you know, from our perspective, people ask me all the time, well, What software do you use? Well, the answer is, we don't. We work with the software that our clients use. They provide us user access to their software, and we would only make a recommendation if that software is no longer meeting their needs. And we work with so many clients that we can make a good recommendation from that point.

Roger Pierce 10:00
I'm going to keep talking with this. Why entrepreneurs need accountants? Because it's so important. You've just identified a allows you to focus on what you do best, which is maybe not the numbers B, you're going to make financial decisions easier and better and more in real time, but also some hidden benefits. Maybe you can comment going to the bank to raise capital to ask for a loan. If your books are a mess, you're screwed right away.

Daryl Ching 10:21
Yeah, I made reference to the fact earlier that, when I was doing equity raising, how many times we lost a deal because the financials were a mess. In particular, I'm going to focus on the balance sheet, because I would say the profit and loss generally is a statement that's looked at more carefully by an entrepreneur. A lot of entrepreneurs don't bother looking at their balance sheet. Now, if you think about it, the balance sheet is a net worth statement that tells your assets, liabilities and your equity. So if I were to kind of make an analogy, a personal net worth statement would have your assets, like your house, liabilities like your mortgage, and that's exactly what your balance sheet does for your business.

So that balance sheet needs to be really, really accurate. And some examples of assets that a lot of banks and other investors look for is intangible assets. So if you invested in research and development, that's an intangible asset that you can put on your balance sheet, you can capitalize it, and you can amortize it over a period of time. The inexperienced bookkeeper will take all those numbers and just input them as expenses and create a massive loss on your profit and loss statement and show zero on your balance sheet. So that's an example of a shortfall. When you don't have accountants that understand this concept, do your books. That's something that can happen.

Roger Pierce 11:36
It's a good point. And the rules change all the time, right? CRA, IRS, they change things, and then part of the job of an accountant is to be aware of these tax code changes.

Daryl Ching 11:45
Absolutely. One of the things I also want to mention Roger that's important is that a lot of accountants that generally work with small businesses are really focused on tax minimization strategies. Now, when we take on a new client, we ask them for their goals, and sometimes they'll tell us, we just want tax minimization, and that's fine, but I will ask the question, do you plan to get a bank loan within the next three years? Do you plan to approach an investor in the next three years? Do you plan to sell your business in the next five years?

Because that answer may give me pause and consult on my different on a different strategy, where I might say, You know what, because you're going to an investor in about a couple of years, they're going to ask to see two to three years financial statements. So what we actually want to do is be showing maximum profit, because when you raise capital, your valuation is based on a multiple of revenue and poor profit. So we actually want to make that look as attractive as possible. And a lot of times, raising capital and tax minimization are goals that conflict with each other. So you really need to understand where the client is at and what their goals are before you start giving advice. The mistake a lot of accountants make is they automatically assume tax minimization and start giving tax minimization advice without knowing what the actual goals are for the company.

Roger Pierce 13:08
Good advice. I've always said entrepreneurs need some core partners around them. They need good accountants. They need a good lawyer and probably someone to advise them on their investments, which I know you do as well. Maybe you can shed some light on those types of services you guys provide well.

Daryl Ching 13:23
So Roger, we don't actually do investments. We provide accounting services, but we do advise on the personal side. From our perspective, when we work with entrepreneurs, we help them with planning in terms of how much salary they're able to pay themselves. And there's a balance, because the more you pay yourself, the higher income tax that you pay. Now, if we want to talk about investment, we've had these conversations with our clients, because obviously they are people, so we have to advise them on the personal side as well. A lot of entrepreneurs are living paycheck to paycheck in terms of they pay themselves the minimum salary to survive. As an example, they'll pay themselves $100,000 salary. $1,000 salary. They will burn that entire $100,000 salary in expenses, and they will leave zero and not save anything personally, keeping everything in their corporate account. If they are doing that, it's going to be very difficult to save for retirement, unless you feel very, very confident that you're going to be able to sell your business for a decent amount of money, but in order to hedge, we always advise our clients to try to pay themselves a little bit more so that they actually save. So try to pay yourself $120,000 and you know what? You can shelter that $20,000 through an RSP. Take that 20,000 put into your RRSP account, put into investments. Now you know you're actually saving and putting away an extra $20,000 that is growing in investment value over time, and you're paying less tax because you are putting it through an RRSP, so you're really only taxed on $100,000 instead of 120 so that's an example of some advice that we can give to entrepreneur.

Roger Pierce 15:01
Plus, you know, you need a personal income, or demonstrate a healthy personal income, to get a mortgage and get some personal financing too, right? The bank can't see zero for your personal income. They got to see some money coming to you from the business.

Daryl Ching 15:13
That's a very good point, Roger. And as part of our onboarding process, one of our questions on our checklist is, do you plan to apply for personal credit in the near future? And if the answer is yes, our advice becomes very different, because, again, too many accountants default to pay yourself as little as possible so you don't pay tax. The problem with the industry is they default to answers without really understanding the client situation. And I think this is where we're unique and different. We ask a lot of questions before we give advice, because you can't just start giving tax advice and accounting advice when you don't know our client situation.

Roger Pierce 15:51
Now, when we're recording this podcast, we're in February, tax time is around the corner, but maybe you can offer a couple of tax time tips to help the average entrepreneur.

Daryl Ching 16:03
For sure, so much tax advice depending on what type of corporation you are, but a lot of our clients set up a holding company for the purpose, and then the holding company owns the operating company, and especially for entrepreneurs that own more than one business, this is a structure that makes a lot of sense, because in the future, when you plan to sell your business, you now put the capital gain towards a corporation rather than you personally. Now there is a one time lifetime capital gains exemption, and Roger, we go off on a tangent. I can answer this question for 20 minutes, but I'll skip that part, and I'll just say that the holding company kind of defers the personal tax when you sell your business, so that the tax hit is in a corporation instead of you personally, is one piece of tax advice. The other thing I'll say about having a holding company is in the event that you own real estate or you own IP you now have the opportunity to hold on to those assets and keep them so even if you sell your operating business, you can continue to own the property and charge rent to that business. If you have IP, you can charge royalty fees to that business, but it allows you to keep an income even if you sell your operating businesses as a strategy, that's something I can advise on a high level, on a level that kind of affects everybody. I think that for a lot of businesses, it's just to make sure that you are capturing all potential business expenses, and that includes a car that can include mileage. If you go and travel and you're driving around to meet clients, you could expense the kilometers and keep a travel log. If you are working out of a home office, you can charge your home rent as an expense, office supplies, but any business, legitimate business expense should be put through the corporation. If you are using your personal credit card or paying things out of your personal bank account, you should make sure that your bookkeeper or your account is recording those because that's called a shareholder loan. That's money that you are lending to the corporation, and that's money that you can take back out tax free, if it is tracked properly. So those are the few tips I could think of, off the top of my head.

Roger Pierce 18:08
You mentioned home based businesses. A majority of solo entrepreneurs and startup entrepreneurs start from home. Just keep the receipts, let the accountant figure it out. I mean little things. I think I'm right about this. If you're working from home, can't you write off a portion of your utilities and your gas bill and things like that, proportionate to your home office? Using square footage.

Daryl Ching 18:27
Absolutely based on square footage. So as a simple example, if the home office represents 25% of your house, then you take the market rent that you would generally pay the development utilities, and then carve out 25% as an example.

Roger Pierce 18:42
Perfect. There you go. You just saved our listeners 1000s of dollars. Absolutely. Let's talk about CFO services. Can we talk about that? What that is and why I would need them?

Daryl Ching 18:55
Now, I think that when a lot of small businesses engage an accountant, they get tax advice once a year, and then hire bookkeepers, and then sometimes you hire even controllers and mid level accountants so that you get more accuracy in your in your books. And a lot of times you might be having be subject to review, engagement or audit because you're trying to comply with a bank facility. What I find is missing in these services a lot of times, is you have people that know only how to look backwards, if you think about an accountant, even that spent 20 years at a large firm, like a KPMG or Ernst and Young if they spent all their time in audit and tax, they haven't really learned how to coach a business, how To, you know, pivot their business strategy, how to do a forecast and look forward for three years, how to help them, advise them on a capital raise. All you've done early is you've been an audit and tax you've spent your entire career looking backwards, doing historical financial statements. So even controllers at a price tag of 120 $150,000 a year. A lot of them don't know how to do a budget or forecast looking forward. You might be surprised to hear this, but it's absolutely true to me, a CFO, the difference between the CFO and a general accountant is a CFO knows how to look forward. The CFO is able to provide some advice and say, What are your goals? Here is your vision. Here's what I project out for the next three years. Here are the milestones that we set on year one, year two, year three. Here's what you need to do to get there. And I could advise on UK. You need, obviously, you need to raise $500,000 of capital. I think we should do it through a venture capital firm. I think we get an additional $500,000 of debt financing. And here is the budget.

I think we need to hire these people. I need to think we need to invest this level of capital expenditure. But basically, a CFO is able to help a company, based on their goals, look forward and design a strategy so they can actually meet their goals, and a CFO is able to keep them on track. The CFO is obviously also able to do all the other services that a controller can do, that an accountant to do, can that a bookkeeper can do as well. But I think that's the difference maker. When you talk to a lot of business owners, they're like, I don't really have a sounding board. I've got somebody who, like, does a great job on my financial statements. But when I say, Hey, should I pivot to e commerce? They're like, I don't know. Should I hire a salesperson if you want to, whereas the CFO is able to give a more meaningful advice from be able to look forward and the years of experience working with other businesses in similar industries and seeing how they have succeeded and failed in the past.

Roger Pierce 21:35
Great explanation of the two and people should remember you don't have to hire someone full time. There are part time CFOs, fractional CFOs…

Daryl Ching 21:44
Absolutely. And you know, this is where this is a little bit of a plug for our business. So thank you for that, asking that question, Roger. But we offer from soup to nuts. We've got basic services like Bookkeeping and Tax. We've got profit maximization services where people say, I just want better financial statements. I want you to help me improve my gross profit margin, and I want you to help me improve my profit by looking for redundant expenses. And we've got strategy so a company that works with us, even if they're a startup, they can start with bookkeeping services and grow into a lot of our premium services as they get bigger. We can charge by the hour. We can flex our hours up and down based on the requirement of the business, and we can even flex down. We have had businesses that fell into challenging times, and they asked us to lower our fee for a temporary period of time and reduce our services, and we can do that immediately. So that's the advantage of working with a firm in general, is a lot of times the firm can flex and put the resources required based on the needs of each business, as opposed to getting involved with a direct hire. I mean, a CFO costs a minimum of $250,000 a year. A good one. A lot of companies don't need that. You're going to have that person doing bookkeeping, because there's just not enough to do.

Roger Pierce 22:57
I got a stat here too on this, and you mentioned financial literacy and having someone like a sounding board to talk to. And, you know, small business owners, we can't know at all. That's part of the challenge. We don't know everything about everything. But I got the stat here, the average small business owner reports a loss of $118,121 in profits due to their lack of financial knowledge. Right? So pays for itself if you bring in someone who can help you with this stuff.

Daryl Ching 23:26
Yeah,I mean, the here's what my observation when we talk to CEOs, they know their top line revenue and they know their bottom line profit, but a lot of them don't know what's in between. It's the in between details that can really help you with the profit, because if you don't know your gross profit margin by product and by service, then you don't really know how much you can scale. And a lot of times, we'll go through fixed expenses, even for just for one month, and we'll find one to $2,000 of redundant or non essential expenses. And we'll say, do you still need this? Oh, I didn't know I was still paying for that. And then you eliminate that, and then all of a sudden, you've gotten rid of $2,000 a month in expenses. I think a lot of CEOs are so sales driven that they only look at how to grow top line, where sometimes, if you're looking out for profit, looking to cut expenses, is actually easier to do.

Roger Pierce 24:16
We wrote a lot of content for banks to put on their websites during COVID. Resilience guides like you're talking about, you know, how to survive COVID and small business resilience strategies. And that's exactly what was in there. You know, first look inside your organization. See what you can cut, see what you can trim. Can you refinance? Can you lease, as opposed to to buy, so you save the capital for for other uses. You know, all these things we gotta look within the business first. It's not always about driving sales, which it can be hard to do.

Daryl Ching 24:46
That reminds me of a story Roger. Actually, it was during COVID where all of a sudden our capital raising services stopped and like they were just wasn't happening anymore, and we were helping companies reduce expenses, because every. Every company was in a position where they had to cut 40 50% of their expenses.
So we started going through their staffing, looking at their org charts, looking at different expenses, and we would eliminate 50% of their expenses, and a couple months later, they come back and say, Darryl, you know what's weird? We cut 50% of expenses, but we didn't see a 50% drop in productivity. Or you maybe saw like a 20% drop in productivity because you had employees that were had redundant roles, or they were both doing things that didn't need to be done. You had subscriptions to software that nobody was using anymore, but nobody bothered to turn it off. There's a lot of these things that happen in organizations, and you shouldn't feel bad. It's just it's common and it gets caught up in it. But this is why it's helpful to have an accountant who's watching this kind of stuff, because a lot of times having somebody who's watching expenses that individual can pay for themselves.

Roger Pierce 25:53
Yeah, an accountant should be your closest advisor part of your business organization.

Daryl Ching 25:58
So essentially, I mean, COVID was an opportunity for everyone to hit the reset button. And I hope that everybody learned from that, where they said, You know what, we shouldn't just do that when a pandemic comes, we should be doing this all the time, whether it's once a quarter, whether it's twice a year, of just doing a review, of saying, you know, our companies have has evolved. Does this expense structure still make sense based on how much our business has changed today.

Roger Pierce 26:23
Okay, I got it. That's excellent. Just watching the clock here too. I could talk to you all day, but I want to bring you back to the other side of the spectrum, the pure small startup, the solopreneur, someone who says, ah, what do I need an accountant or a bookkeeper for? Why should I separate all my expenses and why should I spend my hard earned dollars, my scarce dollars, on those types of services? What would you say to someone like that?

Daryl Ching 26:46
I would say to this individual that, and this is what I hear from a lot of them, is, you know, for the amount of money that I'm going to pay for bookkeeping, I could probably hire someone part time to do sales and pay them a commission and generate more sales. So why would I invest on anything that doesn't generate sales. And in a very early stage, I would, to a certain extent, agree that sales is the most important thing to invest in, and that without sales, you don't have a business. But what I do is I sound the alarm on putting no investment into accounting, where it's if you, over time, are not tracking your expenses.

And two years go by, and then you get to the point where you actually need are looking for for capital, as a lot of businesses are, and you have no financials to show it's going to be very, very difficult for you to get any financing. You're going to scramble to put financials together, and then you're going to have be going based on memory, looking at your at bank statements from two years ago and going, what was that transaction for? And that is a very, very painful exercise to go through, and you're going to end up taking 10 times more time trying to come up with financial statements, because you need to look at, look for invoices from two years ago, versus just having everything up to date as is, there's no more painful exercise than doing a cleanup, because I've done this before with businesses that had the bookkeeper and accountant show up once a year and inaccurate financial statements, we sometimes had to go back and clean up three to five years of the balance sheet, and that means looking at bank statements from three years ago, looking at a transaction in February that says E transfer, 56543, and going, what was that? That's not a fun exercise, so invest a little bit into accounting. Obviously, I would not advise anybody to spend 1000s on CFO services or anything like that, but having just documented invoices and having simple bookkeeping so you know what every transaction is marked is very important, because you're going to need that information when you approach an investor.

Roger Pierce 28:50
And fun fact, most banks, I believe, require at least two years of financial statements before they even consider giving credit, don't they?

Daryl Ching 28:59
They do,and a lot of them now are insisting on one at least one year profitability as well. That's a hurdle that I know is tough, especially for a growing business. But this is where it helps to have an accountant. Because if you are capitalizing things like research and development, if you build a website, and you're not putting all into an expense in one month, and you're putting on your balance sheet, even a growth business can be profitable on paper, that's where it becomes very important. When you're dealing with banks and investors that you're dealing with account that knows how to prepare financial statements specifically for an investor.

Roger Pierce 29:31
And what kind of trouble? Again, thinking of the micro startup entrepreneur who's running their business out of their personal banking account and hasn't heard this podcast yet, what kind of trouble can a cash based business get into Darryl, who may be inclined to, you know, put a few bucks in their pocket?

Daryl Ching 29:47
Anytime that there is money transferred from a business account into personal This is the transfer that's going to be looked at the most carefully by the Canada Revenue Agency. And. Every time they're going to ask the question, is this income? If you are taking money out from a business account, putting into personal and that is a one way street, and that's continually happening, and you're not reporting any payroll, or you're not reporting it as dividends, you will get caught. The Canada Revenue Agency will at one point go, what is this money. Now you can say it's a loan, but you can only get away with that for so long. Because a loan is to be repaid, you have to show a propensity to repay, and you have to show that you are making efforts to repay the business within that year. If, for example, you do this for two years straight, CRA is eventually going to get you and say, we deem this income.

What they're going to do then is they're going to deem it as salary, and they're going to hit you with back penalties on payroll taxes from two years ago. And that is a severe penalty, because it's not just interest, but it is late filing penalties as well, and it can put you into a lot of trouble. So for any company that is just pulling money out of a personal account, we advise you to stop doing this. Speak to an accountant, see how you can take that money out in a tax efficient way. And the other thing too, keep track of any business expenses that you spend personally. Like I said before, if you are using your own personal money and you spend $50,000 on business expenses, that is a loan you're giving the corporation that's $50,000 you can now take back out tax free. So when CRA asks you that question, you say, Well, no, look, here's all my receipts. Here's the shareholder loan. I was just repaying myself on a corporate loan. So those are some of the tips that I would give for a startup.

Roger Pierce 31:37
And you mentioned CRA, and I'm also thinking again, of businesses dealing in cash, like a restaurant or a contractor who might not even declare the money right, might have cash paying under the table. That's a big no-no, isn't it, absolutely.

Daryl Ching 31:53
I mean, the CRA has guidelines in terms of flags to look for. They understand that there is going to be some cash basis when it comes to certain businesses, but they all have guidelines and standards to follow for every industry. Of what looks odd if you are running a restaurant and you're reporting a very low amount of income, and you're constantly reporting a loss, and your loss is very big, at some point they're going to say, well, how are you keeping this business run? So there are flags that come up in which CRA will start questioning you on reasonableness. So it's almost like it's just common sense. It's a sanity check, right? Does this make sense? I were working for the CRA, would this financial statement look reasonable to me as a business, and does this make sense? So you're absolutely right. Roger.

Roger Pierce 32:44
Darryl is running a restaurant, say, in downtown Toronto, and it's two years old, and it's got seating capacity of 60 people. By our numbers, he should be making x number dollars and reporting so much money. And if he's not reporting that money, red flag, right?

Daryl Ching 32:56
How is he keeping the business running?

Roger Pierce 33:02
It's not all sweat. Oh my gosh. This is fantastic. I hate to wrap it up, but before we get there and I'll get you to give your contact info in a minute, but can you share a piece of advice, something you'd like to offer to a startup, a new entrepreneur, someone getting going that you think is important?

Daryl Ching 33:20
Yeah, and this is not finance related at all, but from my perspective, the most important decision that I've made as an entrepreneur is are the people that I hire. It's very, very easy for an entrepreneur to go, Well, I just I want to hire the cheapest labor I can find, and I want to only hire contractors, and I don't want to make any commitments to them when you are in a startup phase. I understand why this needs to be done, but if you're on a growth trajectory and you actually want to take a real plunge in into entrepreneurship, and you're not just dipping your toe in the water, I think every entrepreneur at some point comes to those crossroads where they say, Okay, I'm ready to take a few months of losses. I'm going to make an investment and hire a full time employee, or I'm going to make an investment into my software development, whatever it is, even though I don't have the revenue to support it, I'm going to need to make this investment so that I set myself up for success. Because if you try to run out of break even every month. Even when you're in growth mode, it's just going to be impossible to grow. Now that's not to say you shouldn't have an exit strategy. So you can say, this is my limit. I'm gonna I'm gonna put $100,000 in my business. If I blow through the $100,000 and I'm still not generating any revenue, I'll call it quits, and it's a good idea to have an exit strategy and know your tolerance for how much you can lose. But I do think that there is a number for every entrepreneur that needs to be invested to take a real run and ensure that your business is successful. And part of it is yes, hiring a solid, full time employee as a. First step, there you go,

Roger Pierce 35:01
absolutely play to your strengths, delegate your weaknesses. The biggest hire for small businesses, the biggest cost is usually a first hire and then multiple people. So it's a scary moment, for sure, but it pays off, because all of a sudden you're free to sell and work with clients and grow as a business, and all the things you were probably drawn into entrepreneurship to do, right?

Daryl Ching 35:23
So, very scary. I mean, I can't remember when I did it during the rebrand process, when we rebranded distance, I remember that we were really shifting into accounting, and I started hiring employees, and I didn't have the revenue supported. I invested a lot of money into a rebranding strategy, so the distance logo website that was expensive to get all of that redone, and I started investing in SEO and things that I never invested in before, and I watched my bank balance drop by over $100,000 before it started rising up again and I became cash flow positive. But do I regret that? Absolutely not. There is no way I would have gotten to where I am today with 10 full time employees if I didn't take that risk. So I have no regrets about taking that risk. It could have gone the other way. I could have invested it, it failed, and then I went back to being a solopreneur. That's the other path. But I don't think I could possibly have gotten to where I am today without taking the plunge and taking a little bit of risk. Fantastic,

Roger Pierce 36:20
the risks and the rewards of entrepreneurship, fantastic. So listen. Darryl Ching, how does someone get a hold of you? You

Daryl Ching 36:30
can come to our website at www.vistancecapital.com or email me at Daryl.Ching at vistancecapital.com so that's D, A, R, Y, l, dot, C, H, I N, G at vistance capital.com

Roger Pierce 36:48
Fantastic. I'm going to put your website link in our show notes and whatnot so people can click on it easily. Well, listen thanks again. I really appreciate you being here and to our listeners. Thank you for being here and listening to this episode of The Unsure Entrepreneur. Bye for now.

Outro 37:07
That's it for this episode of The Unsure Entrepreneur podcast. Thanks for listening. Be sure to subscribe so you don't miss other candid conversations with small business owners. And be sure to check us out at unsureentrepreneur.com you