Optimization — is One of the Main Principles of Running a Profitable Business
Business is profitable if you get more income than you spend — it is a simple formula. In order to use this formula in your business you need to use ways of optimizing your expenditure to increase your income.
The base for optimization of small and middle-size business is a simplified system of taxation, while for large business like holdings and corporations, it is a properly built structure.
Usually, especially in EU counties, there are less strict demands for small and middle-size business provided by directives and regulations in order to give them the opportunity to develop business effectively in competitive conditions. There is almost a similar system in Ukraine. For example, the system of taxation for small business is simplified.
Taxation is regulated by laws, namely On the System of Taxation Act of Ukraine of 25 June 1991, No.1252–XII-BP, On Taxation of Income of Enterprises Act of Ukraine of 28 December 1994 No.335/94-ÂÐ, and the Decree of the President of Ukraine On the Simplified System of Taxation, Account and Accounting of Small Business Entities 28 June 1999, No.746/99. The last one allows private entrepreneurs (the average number of employees, including their family members, should not be more than 10 persons per year and their annual profit should not exceed UAH 500 000) and legal entities (companies with any legal form, the average number of employees should not exceed 50 persons per year and annual profit should not exceed UAH 1 million) to pay a fixed tax on a monthly basis. There is a difference between them — a private entrepreneur has to pay UAH 20–200 every month by the 20th of the month and the legal entity has to choose either a tax including value-added tax (10% of profit) or not (6% of profit plus value-added tax according to On a Value Added Tax Act of Ukraine of 3 April 1997,No.1681/97-BP). As we know, this resource is continuously used by companies to optimize their taxation, as normally they develop the structure to be charged according to the simplified taxation system and not the general one.
Now we have a situation in Ukraine, when our legal acts are imperfect as they contain many loopholes in regulation of various relations and the entire legal system, which has just started the process of adaptation to EU standards and requirements, and this leads to many opportunities that are used by entrepreneurs. They use novel ideas in business for which there are no legal regulations or they use legal ways of optimization that are not forbidden yet. It is not a secret that legal systems, like the Ukrainian, sometimes Russian, are attractive for entrepreneurs because there is a huge range of possibilities to earn money in a fast, but not stable way purely due to the absence of legal regulation. But this is just one more simple formula of using a temporary optimized scheme that is created for the present time and for these conditions and is profitable today and so it is beneficial for business.
The latest example of using the temporary optimized scheme with the pay terminals (software-technical complex of self-service) is widespread in Russia, so as in Ukraine. Entrepreneurs used to use it without legal restrictions and charges just because there was no legal regulation. This was prior to the adoption of the Decision of National Bank of Ukraine On the Settlement of Questions of Realization of Operations with Application of Software-technical Complexes of Self-service of 5 March 2008, No.53. This Act just defined the subjects that can use it — “banks and financial institutions, which have the proper license in relation to transfer costs, pay organizations and/or the members of the pay system, and also entrepreneurs that conclude agent treaties with banks”, but there is no system of control, especially tax control. The system of control on taxation of these services is just being developed. There is an act that regulates registers of pay operations and has the system of Z-report — On Application of Registers of Pay Operations in the Field of Trade, Public Food Consumption and Services Act of Ukraine of 11 July 1995, No.266/95-BP, but this system is useless for pay terminals, as they don’t have such technology.
However, there are other methods of building up a profitable business apart from tax optimization or implementation of temporary schemes. These are optimization of contract relations with contracting parties, developing optimized schemes of cash flow, staff management (outstuffing), franchising, GR, etc., as used in structuring of large and middle-size business.
As for large businesses, such as building holdings and corporations in other spheres, first and foremost it is essential to develop an effective structure and contract relations between the counterparts in order to use schemes of optimization — like optimization of cash flow using different schemes with bills of exchange, also credit and deposit relations, factoring. Even if counterparts are not in the structure of one holding, this does not exclude effective contract relations. We can use the example mentioned above with pay terminals. Two counterparts — the first one is a mobile company that provides mobile services and rents pay terminals in order to provide services via them. Moreover, the company uses them to provide a top up mobile phones service in order to save money on producing, transporting and selling top up cards, but it provides these services without a license. The second counterpart is a bank that loses potential profit because pay terminals are used to pay various bills, except the top up service, and the bank does not receive profit from every transaction but it merely has a percentage from one transaction collected by the company. This was a problem for both counterparts before they made a deal — an agent agreement: first of all the mobile company will open a deposit in this bank and all the transactions will be carried out by the bank. After the collection of money from the pay terminals, the mobile company will top up the deposit in the bank. It is also important that the mobile company will have the right to sell this service provided via pay terminals legally with a license of the bank and, secondly, the bank will have a percentage from all transactions.
The situations mentioned above are usually regulated by Government by developing and implementation new laws, but it takes a lot of time because of the political and economic situation. As a result, newly adopted legal acts lead to more conflicts of law and makes the running of business unstable.
All these factors influence business, especially the investment climate in a bad way. One possible solution to this issue is government relations (GR) management, which is also one way to optimize the running of a business. This institute became really widespread in Russia and started to appear in Ukraine. There are two ways of managing government relations: the first one is to create a special department on government relations in the company and the second way is to hire external specialists on government relations that can represent a company’s interests in government. The system is the same for both variants — we can combine business necessity and government requirements by developing relations with government representatives; as a result new laws will be adopted faster with fewer weak spots in them. It will optimize the work of companies, especially foreign ones that come to the Ukrainian market, because many spheres such as telecommunication services, intellectual property are hardly regulated at all. When companies want to run profitable and stable business in such areas like telecommunication, in Ukraine they will definitely face lots of unregulated aspects that will lead to missing time and, as a result, money. GR is the best variant to optimize such business in countries where you have the chance to do it.
In the current crisis conditions it is necessary to optimize staff management. Today the outstaffing service is really popular — hiring an external consultant decreases expenditures on full-time employees, social payments and taxes. It is sometimes much more useful to see the prerequisites for problem solving or fulfillment of some project and then to choose a specialist according to the importance and complexity of a deal. It gives an opportunity to choose a specialist depending on all conditions: the fee, qualification and importance.
All these factors will help to choose the best alternative for your business.