March 23, 2023

You’re the Boss Blog: The Price of Bad Bookkeeping

Searching for Capital

A broker assesses the small-business lending market.

I recently had to place a small-business owner in a 27-percent annual-percentage rate cash-advance loan. The sad thing about his situation is that he might well have been eligible for a six-percent bank loan. What stood in his way was that he was six months behind in his bookkeeping, and it would take weeks for him to get his books in order.

Unfortunately, he needed the money right away. And there isn’t a reasonably priced lender out there who will lend to anyone with such outdated financials. It’s easy to look at this situation and think that this owner got what he deserved. But the reality is that it’s easy to slip on keeping up the books. I am guilty of it sometimes, too. When I get lazy, I keep an eye on the bank statement to make sure cash is coming out, and I save the bookkeeping for later.

I was reflecting on this recently, as I watched my 12-year-old son play basketball. While I confess to not understanding much about the game, I love the intensity and I love watching how he has grown and changed as a player over the years. And I see similarities between being a basketball player and an entrepreneur.

Perhaps most striking is how quickly you have to flip between playing offense and playing defense. At any moment, everything can change. In basketball, you wouldn’t try to get on the court if your shoes were untied. And in business, you really can’t play the game unless you have a core understanding of your financials and cash flow. Unfortunately, many small-business owners are so focused on their trade that they don’t give sufficient time or attention to their books.

And then the unexpected happens. Suddenly, you are playing defense, and you need those financial statements. If you are unprepared, it’s as bad as being on the basketball court with untied shoes. Every day, at my loan brokerage, we get phone calls from business owners who are dealing with something new and want to look to a loan for help. The state of their financial statements will often dictate what options are available and what rate they will have to pay.

It’s easy to pin the blame for the lack of access to credit on unreasonable bankers. And while I believe the banks share responsibility for the chaos of the last few years, some of that responsibility falls on the shoulders of entrepreneurs as well. Would you lend your own money to a business that had no real sense of where it stood financially? I certainly would not.

The issue of outdated bookkeeping is particularly important at this time of year, when we see many clients who are in the process of compiling their receipts and bank statements for the previous year so their accountants can prepare their tax returns. I recently met with an accountant, Andrew Berg, whose practice is small-business focused and who demands accountability from his clients.

“We require all clients to either have a good internal set of books or allow us to spend the time to get them clean,” Mr. Berg said. “We would not be willing to continue a relationship where the books aren’t progressing toward being clean. The only way to know for sure how the business is doing, and properly advise the client, is to have clean records with accurate information.”

A year ago, I hired a service to do a monthly reconciliation of my QuickBooks Online account. It’s not perfect, but I knew it would at least provide a check against my own chaotic, entrepreneurial mind.

How do you manage your books? How do you ensure that they are reasonably up to date and in-order? Have you paid a price when they were not?

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

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Big Deal: In Miami, Using the South American Playbook

OUTSIDE the United States, many real estate developers have less of an appetite for risk than their counterparts here.

In South America, for instance, developers typically ask buyers to pony up a big chunk of the total price of an apartment in a new development long before it’s finished.

So South Americans pay huge installments — often 50 percent or more of the cost of the unit by the time the building is completed. It’s a system that most Americans, accustomed to financing at least 80 percent of a property with a bank loan, would consider unworkable.

I remember being shocked to learn from the owner of the apartment I rented in São Paulo, Brazil, where I lived as a foreign correspondent, about the schedule of huge payments — totaling 57 percent — he had had to deliver to the developer as the condo building went up. It was all nonrefundable, he told me.

But what if something went wrong, I asked him, like the developer going bankrupt? Or if the economy suddenly exploded into crisis, which is certainly not unheard of in South America?

He just shrugged. That’s simply how things are done down south, where interest rates are much higher, and where historically high inflation made financing riskier and more expensive than in the United States. The practice is especially common in Brazil and Argentina, but also in smaller countries like Uruguay, where Donald Trump has a licensing agreement for a new residential tower in the beach resort of Punta del Este that will require down payments of 40 percent from buyers before construction begins.

That perspective offers a different lens on the risks that developers are taking in Miami’s recent condo boomlet.

The Miami of today is not the Miami of 2004, when property prices were still rising in large part on a wave of speculation, with buyers putting down, at most, 20 percent and then flipping properties before construction was done.

This is post-bubble Miami, where banks are still skittish about backing new condo projects.

So Miami developers have taken a page from the South American playbook — a handy strategy, given how many willing buyers are flocking to Miami from that continent. Developers of several condos downtown and at the beach are requiring initial deposits of 40 percent or more, and more as they get closer to completion. By the time the building is finished, buyers are forking over as much as 80 percent of the total price of their apartments.

“Essentially, the buyers are helping developers build their buildings,” said Ann Nortmann, senior project director for Palau at Sunset Harbor, a 50-unit development planned for South Beach that requires a total deposit of only 40 percent because the developer, SMG Management, expects more American buyers.

Jorge M. Pérez, chairman of the Related Group of Florida and a chief architect of the new strategy, defends it as necessary to get developments off the ground, and to prevent speculators from flocking back to Miami, hoping to flip apartments as they did in the old days.

“Financing died during the recession,” Mr. Pérez said. “We all were awakened by the things that happened. We said, ‘If we don’t have the buyers that will pay for the majority of the price in the building upfront, then we don’t want to take the chance of building these buildings.’ ”

Related has employed the financing strategy in three buildings now under construction in South Florida (Apogee Beach, MyBrickell and Millecento) and in three others where sales, but not construction, have started (Beachwalk, Icon Bay and One Ocean). A 3,200-square-foot penthouse at One Ocean is listed for $8.5 million.

For all six towers, Related is requiring buyers to pay 40 percent by the time construction begins, and even more during construction. By the time they move in, buyers will have paid 50 percent to 80 percent of the total apartment price.

The strategy isn’t exactly keeping buyers away. MyBrickell and Millecento, both in downtown Miami, have all their units under contract, while Apogee Beach has only two apartments out of 49 still available, according to a Related spokeswoman.

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India Ink: Vijay Mallya Dismantles His UB Group Empire

Vijay Mallya, co-owner of the Indian Premier League team Bangalore Royal Challengers, left, with Lalit Modi, former chairman of the Indian Premier League at a press conference in Goa, in this Feb. 6, 2009 file photo.Agence France-Presse — Getty ImagesVijay Mallya, co-owner of the Indian Premier League team Bangalore Royal Challengers, left, with Lalit Modi, former chairman of the Indian Premier League, in a 2009 file photo.

NEW DELHI — Suddenly, everything that was once part of the sprawling empire of Indian businessman Vijay Mallya seems to be up for sale.

Mr. Mallya once took over a sleepy family business at age 27 and reinvented it in his own image, forming a jet-setting, luxury-loving consumer-friendly group of companies called UB Group. Yet in a period of a few days, he seems ready to sell it off piece by piece.

On Wednesday, before the company’s annual meeting, Mr. Mallya told reporters that Kingfisher Airlines was in talks with foreign carriers about a stake sale.  He declined to be more specific.

The airline has not made a profit since it started in 2005, is late on payments for about 70 billion rupees ($1.3 billion) in bank loans, and has not paid most of its staff for months.

“This is a difficult thing to digest,” said Sharan Lillaney, an analyst at Angel Broking. “Mr. Mallya will have to relinquish his crown jewel.”

Just a day earlier, Mr. Mallya’s liquor company, United Spirits, said it was in talks with the beverage giant Diageo about a stake sale. Any deal is expected to dilute Mr. Mallya’s 28 percent stake in United Spirits substantially, to the point where he has little or no control over the business.

His company’s less-glamorous businesses — fertilizers and engineering — are also looking for potential investors or acquirers, analysts and bankers said. Those deals, too, are expected to leave Mr. Mallya without control.

The airline has been the biggest burden on the company’s operations as its executives seemed willing to practically gamble away the health of the group’s other businesses, which were used as collateral for bank loans to the airline. Now Mr. Mallya needs to raise cash to pay off those debts.

Losing control of the businesses he carefully shaped would be a sharp change for a man who was regularly featured on Forbes’s “billionaires list”; who collected expensive cars, as well as sponsored a Formula One racing team; and whose parties, in Mumbai and at his Goa seaside home, were regularly attended by prominent Bollywood stars and some of India’s most powerful politicians.

Vijay Mallya, left, with Bollywood actress Deepika Padukone during a press conference in Mumbai, Maharashtra in this Oct. 30, 2007 file photo.European Pressphoto AgencyVijay Mallya, left, with Bollywood actress Deepika Padukone during a news conference in Mumbai, Maharashtra in this Oct. 30, 2007 file photo.

Mr. Mallya’s airline, which seemed to be modeled loosely on Richard Branson’s Virgin Airways, features red-suited flight attendants, a generous frequent flier program and, at least when it started, high quality food.

He impressed the Paris Air Show in 2007, ordering 50 Airbus planes and promising an overseas expansion to the United States and Europe.

But by 2009, he was forced to take on bank loans to finance the airline, and postpone deliveries of new planes. Instead of flying to Paris or San Francisco, the airline’s new international destination was Dhaka, Bangladesh. Now the company no longer flies international, lists just 12 planes on its corporate Web site, down from more than 70, and has cut its domestic flights drastically.

Even back in 2009, Mr. Mallya was looking for a deal. “We are in discussion with private equity investors,” Mr. Mallya told The New York Times in June of that year. “Certain airlines have shown keen interest as well, subject to the government policy allowing them to invest.”

Profitability has eluded most private carriers in India, where the heavily subsidized state carrier, Air India, skews the playing field and competition was stiff for new passengers from the country’s growing upper middle class.

The Indian government said this month that it would allow foreign airlines to purchase 49 percent of Indian carriers, but the change may have come too late. A few years ago, airlines from the Middle East, Asia and Europe were considered likely acquirers in the Indian market, but Kingfisher won’t attract them now because of its financial issues, analysts said Wednesday.

“I don’t think any clear deal will go through for Kingfisher because the airline is in very bad shape and the aviation business globally is in bad shape,” said A.K. Prabhakar, the senior vice president of equity research at Anand Rathi Financial Services in Mumbai.

Neha Thirani reported from Mumbai.

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