STARTUP: The Good, the Bad, the Ugly

Over the holidays, I got an opportunity to watch a series recommended earlier to me: STARTUP! – (starring Kenyan-born Edi Gathegi). The show has quite an interesting plot of this startup trying to secure investor funding. It starts as the story of one girl named Izzy; who has this brilliant idea to change the world by launching a digital currency known as GenCoin.  In quite a dramatic turn of events, Izzy is joined in her quest by two very different young men, but who buy into her idea; and the trio set out to build the world’s next big thing!

STARTUP is basically a reflection of our current world – there are those with ideas, and those with the money – and the challenge has been to match the two: on the one hand, those with the money are asking,

“Where do I invest this money for a good return? How am I sure it is a worthwhile venture?…”

On the other hand, there are those with ideas and they are asking,

“Where do I get the money to make this idea a reality? Where do I get the seed money to make this idea grow into a huge tree and even to a forest?”

So this is a very modern series, set in the current 21st century circumstances of matching money with ideas. I should note here the striking coincidence that as I watched this, Strive Masiyiwa had just started on a series of Facebook posts about financing for your business: very good practical stuff.

The Good, 1: Entrepreneurial Character 

Set in our present day, many businessmen will identify with the STARTUP. It is easy to identify with the entrepreneurial character exhibited by the team. The first thing an entrepreneur may encounter when they start out is ridicule from close friends and family, who wonder why the crazy idea to start a business – especially if you are young and just from school. This is not to say that we should not be employed after leaving school: in fact, the work environment may be very important to equip you with the skills and attitudes necessary to run your own business. Nevertheless, that ridicule is expected: whether due to the timing, the perception others have about you or even just how much “out of this world” your idea seems.

Taking us through the important values of resilience, tenacity, creativity, ingenuity, teamwork and genuine partnership, STARTUP shows us how possible it is to overcome the challenges that a startup will face.

The Good, 2: Business Language

Another very good takeaway from this movie is language. Great minds in the world of business will tell you of the importance of language. You have to learn the language of the world you want to operate in. Robert Kiyosaki for example says that to run a business, you have to learn the language of money. You have to be able to interpret financial statements. In the same way, STARTUP does a very good job in teaching the language of looking for financing: both literally and figuratively.

Startup. Angel Investor. Proof of concept. Hostile takeover.  Valuation. Buyout. Bootstrapping. Problem. Solution. Why You?

All those are words that a startup in the 21

st century would want to be familiar with. It is the language of that world.

The Good, 3: Disruption

STARTUP, set as it is in our day, captures very well the times we are living in: times of great disruptions in almost every sector. This is a day of countless innovations. Technological advancements are coming at us at dizzying speeds. Indeed, there is no time for one to ever rest on their laurels. STARTUP exemplifies this very well. Even when their original idea is stolen from them, they go back to the drawing board and come up with another brilliant idea that brings their competitors back to the negotiating table.

STARTUP explores possibilities within new technologies particularly for digital currencies and Darknet markets.

Speaking of disruption. STARTUP is in itself a product of Crackle. Now, Crackle is a video streaming distributor of movies and TV shows, owned by Sony Entertainment. The Internet brought about significant disruption in the movie industry; from purchases and rentals to online streaming. Sony could not afford to remain in the past, hence Crackle. # DisruptionGalore!

The Bad

Why is it that today’s TV is so full of casual sex? I think STARTUP would still have been a very good show without all that “sexing up”. I believe it is still possible to do a good show without all the sex.

The Ugly

Gencoin is stolen! The great idea that the three entrepreneurs sought to place on the world platform is snatched from them.  In scenes characterized of tears, the entrepreneurs’ baby is taken from them. They are conned out of their idea and basically kicked out of the company. In a heart rending discussion with her uncle, Izzy puts it thus:

“The lawyers called it a hostile takeover…”

I think this is a sad affair but it happens the world over. Investors come in and as they bring money, it is in exchange of control. The million dollar question is, how much control to give up, in return for how much funding? Also, what kind of funding – is it debt or equity?

A powerful illustration of this reality is Steve Jobs, kicked out of Apple, the company he had founded. Luckily for him, he was able to come back to Apple and at the helm. Not all edged out entrepreneurs are as lucky as Steve Jobs. This is neither to give investors a bad name, nor to discourage entrepreneurs from seeking investor funding. It is just a word of caution: it is important to find the accurate balance between how much you get in funding (without which the business may not grow); and how much control you cede. This calls for wisdom.

admin December 20, 2017 No Comments

Honesty is the Best Policy

As part of our company policy, we generally insist on a down-payment for any work before we start – with only a few exceptions. A client may therefore send all requested documents to us but we make them understand we will not be starting until they have made a deposit. Similarly, once a client has paid up their deposit, we know it is their expectation that we embark on their work at the earliest possible opportunity.

So there is this time when a long time client (one going back many years and who is familiar with the policy) promised to send us her documents for annual accounting work. She also promised to do a bank transfer but encountered some challenges as she was out of town in an area with poor Internet connectivity. Eventually, she e-mailed the documents and let me know that the wire transfer was effected. True to her word, I received a confirmation message from the bank that the money had hit our account.  Now, had she sent the documents just a week earlier, we would have embarked on her work immediately. However, the delay meant that by the time she sent them, it was already the end of the month/beginning of a new month.

Now, the first week of every month is usually the busiest for us – as we generate the previous month’s reports, finalize reconciliations as well as file PAYE, NSSF and NHIF returns for our clients – in other words, routine work. Having paid, there was an unspoken expectation that we would start on her work right away. However, given that this was the first week of the month, this was going to be a really tall order! I must confess that on my side, there was the temptation to tell her that we would be embarking on her assignment right away. After all, we never start on an assignment before payment, and once you pay we start on it right away. There was however another voice urging me to just be truthful – let her know that we were going to delay by a week. The voice of truth prevailed. I e-mailed her noting that given the timing, we could only manage to start her on her assignment the following week. She was okay with it.

Come the following week and as promised, we were keen to get down to her work. We opened the files and, alas! To our amazement, she had sent us the wrong files. Instead of sending 2017 statements, she had erroneously sent 2016 statements. Though marked 2017, they were actually 2016 statements. I wrote to her to let her know of the mix-up.

“My bad,” she said, and sent us the correct files.

It did not seem a big deal but I could not help to think: supposing I had succumbed to the temptation, a week earlier, to lie to her that we had already embarked on her work? What would I have said, one week later, on realizing that these were wrong files? I was quite grateful that in spite of the perceived pressure generated by receiving the down-payment, I had chosen to stick by the truth. It had really saved my face when eventually it became apparent that we had the wrong documents. It had served to confirm that indeed, honesty is the best policy.

admin December 20, 2017 No Comments

Give Unto Caesar

The Kenya Revenue Authority recently announced that the fine for late filing of returns would go up by up to 20 times. Whereas the fine for not filing an individual tax return was Kshs.1,000, this has now been increased to at least Kshs.20,000. This penalty applies for the year of income 2016 onwards. There are instances in which the penalty would exceed the Kshs.20,000 i.e. in instances where the tax due for the year in question is above Kshs.400,000, in which case the fine would be 5% of the tax due.

Is it a New Law?
These enhanced penalties are not exactly new. They were enacted in the Tax Procedures Act (2015) which came into law last year (2016). The Tax Procedures Act seeks to harmonize and consolidate the procedural rules that govern tax laws in Kenya. We can therefore say that by increasing these fines, the taxman has simply decided to implement what the law already handed him. The Tax Procedures Act has itself come under some criticism. Arguably, the most contentious issue in the Act was that the Act provides for the taxman to penalize tax avoidance. Tax avoidance is the arrangement of one’s financial affairs to minimize tax liability within the law. The difference between tax avoidance and tax evasion is that tax avoidance uses legal means to lower one’s tax liability, whereas tax evasion is the non-payment or under-declaration of tax dues. The question that has been posed then is, how can the Authority penalize that which is legal? Diverse views notwithstanding, the law as it is remains to be that tax avoidance would attract a penalty of 200%.

Filing Returns vs. Paying Tax
It is good to note that there is a difference between filing a tax return and paying tax. While they may go hand in hand, the two are distinct. Filing of tax returns would simply refer to the process of declaring an income. Whether there is tax to pay on that income is a different question all together.

Take for example a person whose sole source of income is employment. Such a person already has their tax deducted and remitted by the employer under the Pay-as-you-earn (PAYE) scheme. Therefore, at the end of the year, they have no tax liability owing to the Revenue Authority. However, they are still required to file their tax return i.e. declare that they earned employment income and that this has been remitted to the Revenue Authority on their behalf by their employer.

In this case, there are many people who would feel that filing of the tax return is an unnecessary burden. This is because the employer has already filed the PAYE return (i.e. declared that the employee earned the said income) and also remitted the accompanying tax. This could explain why in 2011, the then Finance Minister, (current President) Uhuru Kenyatta, abolished the requirement by salaried employees to file annual tax returns terming it unnecessary. Uhuru’s proposal exempted employees who had no additional source of income other than their salaries from filing tax returns. Parliament adopted the recommendations but KRA reintroduced the individual tax returns for salaried employees the following year. This according to KRA was the only way to determine if employers actually remitted the tax deductions made on employees’ salaries.

Cumulative Effect of the New Penalties
Obviously, an increase of 1900% is substantial. The impact of this increase is felt even more where the penalties start accumulating and earning interest. Take the example of a university student who joined university in the year 2016 and who does not file the tax return every year arguing they have no income. While indeed the student has no income, failure to file the tax return means they now incur a fine of Kshs.20,000 every year. By the time the student graduates in 2020, the taxman will be demanding from them amounts close to Kshs.100,000. This is quite different from a similar student who joined university in 2011, when the penalty was only Kshs.1,000, and who in 5 years time would be owing Kshs.5,000. Whereas the taxman may not necessarily go after this graduate to recover the tax penalty, it will be very hard for them in future to obtain a Tax Compliance Certificate without first clearing the accumulated penalties and interest.

Filing on the iTax Platform
The Tax Procedures Act enforces the use of electronic returns. This has been possible by utilizing the iTax platform. With the provisions to submit electronic tax returns, iTax makes possible what was not possible under the Income Tax Act. The Income Tax Act required that if the deadline for filing a tax return fell on a weekend or public holiday, the due dates would be the last working day prior to the weekend or holiday. With the iTax however, it is now possible to file tax returns on weekends and holidays.

My advice for iTax users is to view iTax as just one of the other online accounts you possess in this digital age. e.g. Facebook account. The same way that you have to log in to Facebook, LinkedIn, Twitter or even e-citizen is the same way you log in to iTax. Whereas you may log in to Facebook using your email address, the user name for logging in to iTax is your KRA PIN number. What happens when you can’t remember your Facebook password? You simply reset the password by clicking “Forgot Password” and the password reset instructions are sent into your inbox. In the same way, should you forget your iTax password, you simply “forget password” and the reset password instructions are sent into your e-mail address. It goes without saying then that one of the security measures, just like you would with your other online accounts, is to ensure that the e-mail address linked to your iTax account is one in which you have access and control over. Otherwise, anyone who has access to that e-mail address has by extension access to your iTax account.

Filing of individual tax return for salaried employees as well as filing of nil returns is fairly straightforward in iTax. Help is also available in form of tutorial videos, assistance from the iTax support centres and one could also seek the services of a qualified accountant. If a taxpayer opts for the latter, the cost of obtaining the tax/accounting service should be justifiable e.g. if the cost of getting the services of an accountant exceed the penalties in question, the taxpayer may be better off filing the tax return themselves. Whichever the case, no one should find themselves paying the unnecessary penalties by not filing their tax return.