Via Nappy.co
By Viresh Harduth
The stakes are high for small South African businesses following the challenges in the last 18 months, which now includes a potential risk of a fourth wave of Covid-19 infections later this year. This is a time you want to avoid making unforced financial errors to rebuild cash reserves and restore levels of profitability.
Recent Sage research found that small South African businesses admitted they were not well prepared for a pandemic and are now determined not to get caught out again. Some steps they are taking to increase their resilience include reducing operational costs (82%), better managing and motivating workforces (80%), and adopting new technology or digital capabilities (77%).
To that list, I would add tightening financial discipline to avoid unnecessary financial mistakes. Here are four common financial missteps small businesses make and how you can prevent them.
1. Not keeping accurate financial records
Early in a business's life, you can get away with storing your invoices and receipts in an arch lever file and using a spreadsheet to track your transactions. However, as your business grows and the number of transactions increases, this manual approach becomes a recipe for chaos. It becomes difficult to budget and do forecasts or even to manage expenses and assess profitability.
Getting it right
Today, small business owners can easily afford an online accounting solution that makes it easy to accurately record every transaction, send invoices to customers, and keep track of incoming and outgoing payments. The software can help you generate reports, manage cash flow, and create budgets and forecasts, so you always know what's happening in your business.
2. Running your business from a personal banking account
If your business is small and new, you might be running it as a sole proprietor rather than a registered company. There's no problem with that because it keeps admin and accounting costs low. However, it's not wise to use the same bank account for your business as you do for your personal affairs. This makes it difficult to separate personal and business costs at the end of the year.
Getting it right
You should open separate personal and business bank accounts, which will make it much easier to separate and accurately report business expenses to SARS when filing your tax return. It will also help to assess your business's profitability better and track your personal income and spending.
3. Splashing out unnecessarily
During difficult economic times, it's essential to keep a lid on your expenses. Even if you imagine your business to be well capitalised, it's all too easy to burn through a lot of money quickly and not have much to show for it. If you're in an industry affected by the pandemic, it might be a good idea to reassess ongoing expenses like office costs to ensure they are sustainable.
Getting it right
Use your budgets, forecasts and business plan to guide your spending. Take a closer look at every expense and ask how it helps you generate or save money. You can also reduce risk by avoiding long-term financial commitments. For example, rather than hiring a full-time marketing assistant, outsource to a freelancer or use a co-working space rather than signing an office lease.
4. Not staying on top of tax obligations
Each year, you will need to file your personal and company tax returns and have the money on hand to pay SARS by the relevant deadlines. You'll want to ensure you are claiming all legitimate tax deductions, that your VAT and income tax returns are accurate, and paying up will not dent your cash flow or put you into debt.
Getting it right
You should consult with a financial professional to understand your tax obligations and file the correct returns by the relevant deadlines. Watch government communications such as the Finance Minister's Budget, usually in February, to learn about new tax regulations for the year. Use your accounting tools and the advice of your accountant to ensure you are well prepared for tax filing season.
Don't let mistakes get you down
Most small business owners make some financial missteps along the way. The key is to learn from these mistakes to avoid repeating them. Planning your budget, tracking your income and expenses, and getting the help of an accountant can help you avoid making bad financial choices and keep your business on a steady growth path.
Viresh Harduth is the Vice President of Small Business at Sage Africa & Middle East
PERSONAL FINANCE
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