Author Archives: Shrek2014

Discounts, loyalty awards and warranties: Are you recording them correctly?

A1When you sell a product a discount in the form of a volume discount or an early settlement discount may be given to the customer. Another way of encouraging customers to buy from you is to offer a loyalty award. The selling price of a product can also include a provision for a warranty for after-sales service supplied to the customer. 

Volume discounts

The seller can offer a volume discount on the selling price if a customer buys or orders products in excess of an amount or volume as determined by the seller.

An example of a volume discount would be when the seller offers a 10% discount on the selling price of products sold to the customer if the customer buys products to the value of more than R10 000. Alternatively, a discount of 10% may be offered if the customer buys more than 50 units of a certain product.

The amount of a volume discount will be recorded as a reduction in the selling price paid by the customer, thus decreasing revenue in the seller’s books.

Early settlement discounts

An early settlement discount is offered by the seller to customers to encourage them to settle their accounts in a shorter time period than the normal credit terms.

For example, the seller offers customers a discount of 5% if a customer settles their account within 30 days from date of statement instead of the normal credit terms of 60 days.

The seller will record the amount of the early settlement discount as a reduction in the selling price paid by the customer. Once again, the amount of the early settlement discount will reduce revenue in the seller’s books.

Loyalty awards

A loyalty award may be granted to customers in terms of which a customer earns a certain amount of loyalty points based on the amount they spend. The loyalty points can be converted to a Rand value and used by the customer towards paying for products/services in the future.

An example would be where a customer earns one point for each R10 spent on the seller’s products. After the customer earned 500 points, the points are converted to Rands at a rate of 20 cents per point. The loyalty award will come to an amount of R10 (500/10 x 0,20). The customer can then use the loyalty award of R10 towards payment of a next purchase from the seller.

The fair value of the consideration of a transaction subject to a loyalty award must be proportionately allocated between the award credits and the balance of the other components of the sale. The portion of the fair value allocated to the award credits are deferred until the seller fulfils its obligation to supply the loyalty credits. The seller will fulfil this obligation when the customer redeems the loyalty credits.

Warranties/Guarantees

The seller may include an amount as warranty for after-sales service to the customer as part of the sales transaction.

For example, included in the selling price of R5 000 for a lawnmower is an amount of R150 for a standard service six months after purchase date. The seller must defer the portion of the selling price related to the warranty. The deferred amount will be recognised as revenue during the financial period in which the seller fulfils its warranty obligation.

The examples discussed in this article are simple as each example only involves one of the four topics above. In practice, transactions can become much more complicated as a transaction may be subject to two or more of the above terms of payment, in any combination.

If you would like more information about this topic, please contact us for professional assistance and advice.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. 

Reference List:

  • IFRS for SMEs by IASB
  • Training Material for the IFRS for SMEs by the IFRS Foundation
  • IFRS for SMEs – A summary by W Consulting and SAICA

VAT: The difference between standard-rated, zero-rated and exempt supplies

A2There are three categories of supplies that can be made by a VAT vendor: standard-rated, zero-rated and exempt supplies. Output tax must be levied on all supplies except exempt supplies. The VAT Act gives specific guidelines for zero-rated and exempt supplies but these fall outside the scope of this article. Please contact your tax practitioner for more information.

The following simplified formula is used to calculate the amount of VAT that a registered VAT vendor have to pay to SARS or can claim as a refund from SARS:

Output VAT levied on standard-rated and zero-rated supplies* – Input VAT claimed on qualifying expenses = Net VAT due to/(refundable by) SARS

* A supply is defined as the provision of a product or service by a VAT vendor in return for payment in cash or otherwise.

Standard-rated supplies

Standard-rated supplies are supplies of goods and services on which output VAT is levied at a rate of 14%. The input VAT incurred on purchases of goods and services to generate standard-rated supplies can be deducted from output VAT payable to SARS.

Example 1:

  1. XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
  2. The inventories were sold for R10 000 (VAT included).
  3. All inventory sales qualify as standard-rated supplies.

Net VAT due to/(refundable by) SARS will be calculated as follows:

Output VAT levied on standard-rated supplies (R10 000 x 14/114) R1 228
Less: Input VAT on purchases to make standard-rated supplies (R7 000 x 14/114) (R    860)
Net VAT due to/(refundable by) SARS R   368

Zero-rated supplies

Zero-rated supplies are supplies of goods and services on which output VAT is levied at a rate of 0%. The input VAT incurred on the purchase of goods and services to generate zero-rated supplies can be claimed against output VAT payable to SARS.

Example 2:

  1. XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
  2. The inventories were sold for R10 000 (VAT included).
  3. All inventory sales qualify as zero-rated supplies.

Net VAT due to/(refundable by) SARS will be calculated as follows:

Output VAT levied on zero-rated supplies (R10 000 x 0/114) R     nil
Less: Input VAT on purchases to make zero-rated supplies (R7 000 x 14/114) (R   860)
Net VAT due to/(refundable by) SARS (R   860)

Exempt supplies

Exempt supplies are not subject to VAT. No output VAT, either at 14% or at 0%, is levied on exempt supplies. Input VAT incurred on expenses to make exempt supplies cannot be claimed against output VAT due to SARS.

Example 3:

  1. XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
  2. The inventories were sold for R10 000.
  3. All inventory sales are exempt supplies for VAT purposes.

Net VAT due to/(refundable by) SARS will be calculated as follows:

Output VAT levied on exempt supplies R nil
Less: Input VAT on expenses incurred to make exempt supplies (R nil)
Net VAT due to/(refundable by) SARS R nil

Combination of standard-rated, zero-rated and exempt supplies

Where a VAT vendor makes standard-rated supplies and/or zero-rated supplies and/or exempt supplies, input VAT must be apportioned in the same ratio as the three different types of supplies stand to each other.

Example 4:

  1. ABC Distributors made the following supplies for VAT purposes (VAT included where applicable):
Standard-rated supplies R  60 000   60%
Zero-rated supplies R  10 000   10%
Exempt supplies R  30 000   30%
Total supplies R100 000 100%
  1. Expenses incurred in the making of total supplies amounted to R85 000 (VAT included).

Net VAT due to/(refundable by) SARS will be calculated as follows:

Prorata Output VAT levied on standard-rated and zero-rated supplies[(60 000 x 14/114) + (R10 000 x 0/114)]

Output VAT on exempt supplies

  R7 368 

R      nil

Less: Apportioned input VAT on expenses to make standard-rated andzero-rated supplies [(R85 000 x 60% x 14/114) + (R85 000 x 10% x 14/114)]

Less: Apportioned Input VAT on exempt supplies

(R7 307) 

R      nil

Net VAT due to/(refundable by) SARS  R       61

Accounting software can be set up so that VAT is automatically recorded correctly for standard transactions. However, a computer programme will not be able to classify unique transactions for VAT purposes. Therefore it is still important that accounting staff is trained to handle VAT correctly, especially where grey areas exist.

If you would like more information about this topic, feel free to contact us for professional assistance and advice. 

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. 

Reference List:

  • VAT 404 – SARS Guide for Vendors

To sign or not to sign: Handwritten versus electronic signatures

A3We all know that a handwritten signature is legally binding on the party who made the signature. But what about an electronic signature? What is an electronic signature? Will a document be legally binding if signed electronically and not by hand? How easy is it to forge an electronic signature? Why should one consider using an electronic signature? 

What is an Electronic Signature or e-signature?

An e-signature is not an image of a scanned signature which is copied and pasted into a typed document.

E-signatures can be divided into three categories, being Digital Signatures, Digital Certificates and Advanced Electronic Signatures (AESs). All three of these types of signatures are very reliable. The requirements of your business will determine which one of the three to use. The rest of the article will convey information regarding AESs as they are the category of e-signatures recognised by South African Law whenever a signature is required. 

What are the benefits of using AESs?

Making a move to AESs can let things flow faster and smoother in your business while saving you time and money, and even the auditors will be happy because AESs leave an audit trail they can follow.

Once a business starts using AESs, there are certain costs which will be significantly reduced. Some of these costs are:

  • Printing expenses – the business as a whole will use less paper and ink.
  • Courier and postage – documents can be sent electronically via email.
  • Archiving and searching costs – documents can be stored in electronic format and searches can be done electronically when looking for a specific document, instead of filing and paging through piles of paper.

Shorter time delays in certain business processes (e.g. approving quotes for customers) can improve efficiency. AESs are significantly more secure than handwritten signatures due to them being almost impossible to forge, even with the help of powerful computers. The only circumstances where an AES is easily forgeable, is when the signer gives his/her private key out to someone. And finally, adopting AESs will result in your business being more environmentally friendly by saving paper and thus trees and other resources which are in limited supply. 

Why should I trust an AES instead of a handwritten signature?

Even when you are presented with an original document signed by hand, you can’t be 100% sure that it was actually signed by the right person or that the document hasn’t been tampered with, as a handwritten signature can be forged relatively easily. In contrast, AESs require that an accredited authority verify the signer’s identity in person before providing the signer with signing tools.

The electronic signing of a document involves two electronic keys: a private key and a public key. The private key is only known to the signer of the document and the recipient who wants to authenticate the signature. The recipient uses both the public and the private keys to confirm the identity of the signer and that the document was not altered in any way during the transmission process. 

Electronic Signatures and the Law

The laws of different countries have different requirements regarding the use of electronic signatures, which will influence which category of e-signature you will choose to use. AESs are recognised by South African Law as a reliable and valid form of signing legally binding documents for more than a decade already.

The biggest benefit of AESs is its low risk of forging and tampering with a document signed by an AES. Despite the fact that AESs offer better protection to users of documents than traditional handwritten signatures, and that the Law already recognises the validity of AESs, there are still those who are resistant to change. Resistance is often the result of ignorance and education about the benefits of AESs will go a long way to increase acceptance of this safer, cheaper and more convenient way of conducting business.

If you would like more information about this topic, feel free to contact us for professional assistance and advice. 

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. 

Reference List:

Provisional tax: Did you know?

A1Provisional tax payments is not a separate tax but pre-payments of income tax for a specific tax year. These pre-payments ensure that the tax load is spread over the tax year and can avoid a nasty surprise when SARS calculates (assesses) the final income tax liability for that specific tax year.

  • There are three provisional tax deadlines:
    –  Submission of the first provisional tax return (IRP6) is compulsory for provisional taxpayers even if no provisional tax is payable. Submission of the first IRP6 and payment of provisional tax (if applicable) is due within 6 months of the start of the tax year.
    –  Submission of the second provisional tax return (IRP6) is also compulsory for provisional taxpayers even if no provisional tax is due. Submission of the second IRP6 and payment of provisional tax (if applicable) is due within 12 months after the start of the tax year.
    –  Submission and payment (if applicable) for the third provisional tax return (IRP6) is voluntary. The due date for the third IRP6 depends on the date on which the tax year ends.
  • SARS provides guidelines to assist taxpayers in estimating the amount of provisional tax due.
  • If provisional tax was overpaid, the excess amount will be refunded to the taxpayer with interest. However, SARS will do the refund only after the final income tax liability for that tax year has been calculated (assessed) by SARS and the amount of the final income tax liability is less than the sum of the provisional tax payments for the relevant tax year.
  • Underpayment of provisional tax will result in the imposition of (avoidable) penalties and interest by SARS.

If you need professional assistance with the calculations, submission or payment of any of the above returns or would like more information on the penalties and interest that can be imposed if you miss one or more of the above deadlines, please do not hesitate to contact any SARS office.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. 

References:

Estate planning for young adults

A2It is very important for you to plan your estate, which could include a living will, a last will and a living trust. This can help families prepare for difficult times when you are no longer around to assist or advise them.

Our lives get busier and more complicated by the day, so estate planning for young and old becomes increasingly important. Young people should consider preparing certain estate planning documents, and in particular financial powers of attorney and living wills.

At the age of 18 a young man or woman officially becomes an adult in the eyes of the world. This means that you are entitled to make important financial, legal or health decisions about your lives. But what if something happens and you are unable to make these decisions at a critical time? Such situations can range from a small inconvenience to a life-threatening crisis, but if your estate is in order, it can speak on your behalf. Consider the following: 

Financial power of attorney

A financial power of attorney allows you to appoint someone you trust, like another family member, to make financial decisions on your behalf. This document can be activated when you are incapacitated or right after it has been signed, and it will remain effective until you can resume charge of your own decisions again.

A financial durable power of attorney will allow the appointed person to handle important legal and financial matters on behalf of the grantor. In the case of a business or financial situation which involves the young adult, such as a passport or car registration renewal, it is convenient for the power of attorney to act on his/her behalf if they cannot tend to the problem. This arrangement may come in very handy when there is a legal situation which requires quick action and the young adult is unable to attend. Families with a disabled family member can also benefit from the security of a power of attorney. 

Living will

A living will enables you to state specific medical wishes if you are alive, but unable to communicate them. Artificial life support in the case of a coma or terminal illness is an issue often discussed in such a document. Preferences regarding administering of pain medication, artificial nutrition and other treatments can be dictated in this document.

The Terry Shaivo case shows what can happen if this document is not in place. The legal battle between her husband, family and state of Florida lasted for years before she was granted her wish and taken off life support. 

Health care power of attorney

With this type of power of attorney, you give someone else the power to make health decisions on your behalf. These decisions regarding serious health and emotional crises will be made based on instructions which you have given to your power of attorney beforehand. Sometimes a living will is combined with a health care power of attorney, because both of these can be revoked, i.e. it can be cancelled at any time by destroying it, communicating your wishes to your doctor, writing a letter regarding the cancellation or by creating a new living will and health care power of attorney, indicating that the new will revokes all the previous ones. 

Start the conversation

Every family’s legal needs are different, so perhaps you should take the first step in being prepared for the worst. Remember that every time your family composition changes, like when a child is born, you need to adapt your will to include them. Start the process and be prepared.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. 

Red flags (Part 2): Non-financial reasons why small businesses fail

A3Small businesses usually fail due to a combination of financial and non-financial reasons. The good news is that these risks can be addressed before they become a threat to the survival of the business. This article will discuss a number of non-financial risk factors that could lead to small business failure if not addressed in time.

  • Lack of planning 

Business plan:

Few small businesses have business plans or if there is  one, it often ends up forgotten in a bottom drawer. To be of any real value, a business plan needs to be flexible and reviewed occasionally to determine if the business is still moving in the direction that the owner originally planned or if a change in direction is required.

Succession plan:

An up-to-date succession plan is vital to ensure that the business can continue if something unexpected happens e.g. losing a key employee.

  • Marketing considerations 

Target market:

It is crucial to define a target market to ensure that advertising is done through the right channels to reach the target market. The owner/management must stay in touch with changes in the needs and wants of their target market. Every now and then the business should re-assess whether the demand for their product or service is growing, declining or stagnating, and whether their target market has perhaps changed. 

Customer base:

The risk of having one big customer is that losing them might mean closing down the business. Having a large base of small customers in addition to one big customer is much safer. 

Focus on products:

Effort should be focused on marketing the most profitable products or services. This means information on how much profit is made on each transaction should be available. 

Advertising channels:

Today every business probably should have a website and use the same social media platforms e.g. Twitter or Facebook, that their target market uses. If not, you will lose clients to your competition who does make use of these resources. 

Overgeneralisation:

One business can’t be/do everything for every customer. Spreading yourself too thin can diminish the quality of service delivery.

  • Inadequate management skills and experience

Lack of management skills, experience and knowledge of the business sector in which a business operates is a major cause of small business failure. If not addressed in time, poor communication skills and lack of adequate procedures and systems will be a factor that increases the chances of business failure.

  • Unexpected and uncontrolled growth

A growing business can expand beyond the management resources and skills available in the business. If a current employee’s ability to manage and plan becomes insufficient due to the growth of your business, re-training the employee so that he/she is able to meet the changing demands of their work, or appointing a more qualified person should be considered.

  • Incompetent personnel and poor service delivery

Repeat and referral business is where the big money lies. Customers who had a bad experience in dealing with your business, will probably not return and tell other potential customers about their negative experience.

Develop strict guidelines when hiring personnel and put new and old personnel through intensive training to ensure quality service delivery from each employee. The success of a business depends to a large extent on the owner’s attitude, ability to be objective and willingness to bring in help when needed.

If the above content raised any concerns you wish to discuss or need professional guidance on, please do not hesitate to contact any accounting office.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or ommissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial advisor for specific and detailed advice. 

Reference List:

Financial ratios: What do they mean? (Part 1)

A4The purpose of calculating ratios is to get a bird’s eyeview of the financial situation of a business by analysing the relationships between different amounts on the financial statements. The major advantages of using ratio analysis is that it simplifies the information in the financial statements and allows you to compare the ratio results over time in a specific business, or between different businesses.

Some limitations of ratio analysis are the following:

  • There are no specific standards for what ideal ratios should be, so different people may interpret the same ratio in different ways.
  • Single ratios do not necessarily paint an accurate picture. Just like the meaning of a word can differ depending on the context of a sentence, a ratio must be interpreted in the context of the background of the business and the industry in which it operates.

Set out in the tables below are a number of financial ratios with their formulas and a brief explanation of what each ratio measures. 

Liquidity ratios (short term solvency ratios)

The liquidity ratios measure a business’s ability to pay off its current/short term liabilities i.e. the liabilities which will become due in the next 12 months.

Ratio name Ratio formula What it measures
Current ratio Current assets / Current liabilities Can the business pay their debts due in the next 12 months from the assets they expect to turn into cash within those 12 months?Generally a ratio of 1 or higher than 1 is considered acceptable.
Quick ratio (Acid test) (Current assets – Stock) / Current Liabilities Can the business pay their debts due in the next 12 months from the cash and short term investments they have? Stock is excluded from the ratio as it must still be converted to a liquid asset (debtor/cash).Generally a ratio of 1 or higher than 1 is considered acceptable.

Efficiency ratios

Efficiency ratios show how efficient a business is in using its investment in current assets to make a profit.

Ratio name Ratio formula What it measures
Debtor days (A) Average trade debtors* / Sales x 365 Average number of credit days clients take to pay their accounts.If the number of days are high, especially higher than the industry average, it can indicate problems with debt collection.
Stock days (B) Cost of sales / Average stock** Average number of days it took from receiving stock to selling the stock.If the stock days are higher than the average stock days for the industry, it can indicate poor stock management, for example, having too much money tied up in stock.
Creditor days (C) ((Trade creditors + accruals) / (Cost of sales + other purchases)) x 365 Average number of days it takes from purchasing from a supplier until paying their account.If the creditor days are very short, it may indicate that the business is not taking full advantage of trade credit available to it.
Cash conversion cycle (CCC) Debtor days + Stock days – Creditor daysOR

(A) + (B) – (C)

How fast a business turns stock into sales (debtors), then turn those sales (debtors) into cash by collecting what the debtors owe them, and then pay its suppliers for goods and services bought from them.The shorter the CCC, the better. This will mean:

–          Better liquidity,

–          Smaller need to borrow money,

–          Money available to make use of discount terms for cash payments to creditors,

–          Better capacity to fund expansion of the business.

*Average trade debtors = (Debtors’ opening balance + Debtors’ closing balance)/2

**Average stock = (Stock opening balance + Stock closing balance)/2

If you need professional assistance with the above calculations, submission or payment of any of your provisional tax returns, please do not hesitate to contact our office. Our staff are friendly and knowledgeable and are looking forward to the opportunity to assist you. 

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions, nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. 

Reference List:

SARS: Procedure to change banking details for Personal Income Tax (Individuals)

A1SARS is responsible for protecting taxpayers against unauthorised changes to their personal details. Taxpayers wishing to register or change their banking details must visit a SARS branch in person and present the documentation required for verification before SARS will process any changes to their banking details. 

Requirements for different types of bank accounts

  • Own bank account:
    –  The account holder must visit a SARS branch in person with the documentation set out in point 1, 2 and 3 below.
  • Joint bank account:
    –  Both account holders must visit a SARS branch and each of them must take with them the documentation set out in point 1, 2 and 3 below.
    –  SARS will verify both account holders’ details before registering or changing banking details.
  • Third party bank account:
    –  The main account holder must visit a SARS branch in person and take with him/her the documentation set out in point 1, 2 and 3 below.
    –  If a refund is due to the taxpayer who is the third party, he/she will have to open their own bank account. SARS will not pay the refund into the account of the main account holder.

Can I send someone else to  the SARS branch on my behalf if I give them power of attorney?

No. The taxpayer must still visit a SARS branch in person to register or verify his/her banking details except for certain exceptional circumstances set out in the following paragraph.

The exceptional circumstances where SARS will allow registration and verification of banking details by someone else than the taxpayer, provided that the other person has power of attorney, are when the taxpayer is:

  • An estate due to death or sequestration
  • Incapacitated or terminally ill
  • A non-resident (emigrant/expatriate/foreigner/temporarily outside South Africa)
  • In jail
  • Under 18 years of age 

Documentation required for verification of banking details

  1. Proof of identity:

Original and valid ID document/Passport/Driver’s Licence/Asylum Seeker’s Permit plus one certified copy thereof

  1. Proof of banking details:

2.1  Copy of bank statement with original bank stamp or ABSA eStamped statement

  • Not more than three months old
  • Must confirm account holder’s details:
    –  Legal name of account holder
    –  Account number
    –  Account type
    –  Branch code

or

2.2  Taxpayer opened a new bank account but have not received a bank statement yet

  • Original letter stamped by bank on bank’s letterhead confirming:
    – Legal name of account holder
    – Account number
    – Account type
    – Branch code
    – Date on which bank account was opened
  1. Proof of residential address:

Copy of any one of the documents listed below.

3.1  Document not older than three months:

  • Municipal account
  • Student fee account
  • Co-op statement (farmers)
  • Medical aid statement
  • Telephone account
  • Court order
  • Subpoena
  • Traffic fine
  • Documents relating to UIF or pension payout

3.2  Document not older than six months:

  • Mortgage statement from mortgage lender

3.3  Document not older than 12 months:

  • Motor vehicle licence documents
  • Life assurance document
  • Short-term insurance document
  • Health insurance document
  • Funeral policy document
  • Statement from share, portfolio or unit trust investment
  • Current and valid lease/franchise agreement

3.4  If none of the above documentation is applicable/available, the taxpayer must complete and submit Form CRA01.

  • If proof of residence is in the name of a third party, the taxpayer must submit together with CRA01 a certified copy of the ID document/temporary ID/passport/driver’s licence of the third party. 

Tips

  • Make sure you have all the required documentation when you go to SARS otherwise SARS will not update your banking details. You will need to get all the documentation together and go to a  SARS branch again.
  • Make sure that the following stamps appear on all certified copies of documents:
    –  “True Copy”
    –  Commissioner of Oaths
  • Ensure that copies are certified by a person authorised to do so, for example SAPS/SAPO/attorneys.
  • SARS does not permit credit card/mortgage/foreign bank accounts for refund purposes.

SARS is taking their responsibility to protect taxpayers’ banking details seriously. Despite the inconvenience, it is to the taxpayer’s benefit to confirm their banking details with SARS to ensure that the taxpayer entitled to the refund will actually be the person to receive the refund. 

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or ommissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. 

References:

  • IT-ACM-06-G01 – Change of Banking Details for Personal Income Tax – External Guide
  • GEN-BR002 – Changing Your Banking Details – External Brochure

Red flags: Financial reasons why small businesses fail

A2Many people dream of starting their own business. Few of the dreamers get as far as actually starting a business. Even fewer of the businesses survive in the long-term. Too often small businesses fail due to reasons, financial and otherwise, that could have been managed or altogether avoided. Continue reading to see if you recognise any of these red flags in your business. 

Lack of financial skills, financial planning and financial management

Have you done any financial forecasts for your business? Never?

Do you control spending with a budget?

Do you know how much income (revenue) and profit (no, they are not the same thing) you are making on each transaction? Are you focused on the products that generate the most profit?

Are you aware of the cycles (e.g. seasonal cycles) in the business sector you operate in and do you plan your cash flow according to the effect these cycles will have on your income and expenses?

If you answered “No” to any of the above questions, that could be a red flag popping up. 

Not enough cash reserves/savings

The minute any business starts to struggle with cash flow, a red flag immediately goes up because no cash means no business.

Something bad or unforeseen is bound to happen to your business from time to time – that’s life. The question is, when it happens, is there enough cash available to recover from the setback or challenge? No? There’s that red flag popping up again.

Some other sources of potential cash flow problems worth looking into are:

  • Falling behind on payments of day-to-day expenses e.g. suppliers, rent.
  • Borrowing money without a realistic plan or the means of repaying it.
  • Paying suppliers COD but selling to clients on credit. Does your business have enough cash reserves to pay suppliers immediately and wait for payment from your clients for possibly more than a month? Ideally the business should be able to pay suppliers on time and coordinate these payments with cash inflows from clients.
  • Uncontrolled personal use of business money – in other words: raiding the business’s cash register whenever you need money for private purposes.

Poor accounting

You can’t control and manage your business if you don’t know what’s going on with the finances. Business decisions need to be based on accurate, up-to-date financial information otherwise you are flying your business blindfolded. Remember: you can’t manage what you can’t measure. 

Lack of awareness of the relationship between different functions of a business

Consider the following statement: Without money there is no business and without business there is no money. Or to put it differently: If you neglect sales, there will be no money flowing into the business and if you neglect managing the money, you will not be able to pay for the products or services you need to generate sales.

There is a fairy tale idea that an established business will just run itself. If there were any truth to this idea, there would have been a lot less small businesses going out of business or failing for various reasons. If you want to ensure that your small business will thrive now and in the future, there are certain things you have to do. It is never too late to start doing cash flow planning or draw up a budget. Remember that even a mature plant needs to be watered so keep those forecasts rolling!

If the above article raised any questions in your mind or you need professional guidance on this topic, please do not hesitate to contact a business consultant who can assist you in the planning of your business. 

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or ommissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. 

References:

10 Wenke hoe om uitgawes dop te hou

A4Hou jy behoorlik boek van jou klein onderneming se besigheidsuitgawes (operasionele koste)? Dit sal onnodige koste besnoei en jou meer voorbereid vir belastingtyd maak as jy jou uitgawes gereeld aanteken en aanpassings maak.

Probeer hierdie wenke om jou besigheidsuitgawes beter te bestuur:

  1. Gebruik sagteware. Rekeningkundige sagteware soos Quickbooks en sigblaaie van MS Office maak bestuur van uitgawes makliker. Kies dieselfde program as jou boekhouer of ‘n versoenbare een; sodoende kan jy inligting direk na jou belastingopgawe oordra.
  1. Wees gereed vir belastingtyd. Wees noukeurig wanneer jy aftrekbare uitgawes soos voertuiggebruik vir besigheidsdoeleindes, reis- en onthaalkoste, voorraad en toerusting, en bydraes aan verenigings en liefdadigheidsorganisasies aanteken. Die SAID-webtuiste voorsien  details oor hierdie uitgawes.
  1. Hou persoonlike en besigheidsrekeninge apart. Moenie persoonlike kontant, kredietkaarte of tjeks vir besigheidsuitgawes aanwend nie. Maak seker jy debiteer die korrekte rekening wanneer jy jouself of werknemers vergoed, om verwarring en navrae van SAID te vermy.
  1. Stadig met die kontant. Betalings uit die kleinkas moet beperk word – skep eerder ‘n kleinkas-rekening in jou boekhouding om effektief hiervan boek te hou.
  1. Bewaar alle kwitansies. In geval van ‘n oudit gaan jy alle kwitansies benodig om jou eise te staaf. Skryf dus die doel van die uitgawe op elke kwitansie, en neem foto’s daarvan of skandeer dit in die rekenaar in om bergplek te spaar en moeite te verminder.
  1. Teken inligting dadelik aan. Teken uitgawes dadelik aan sodat dit nie ophoop nie en jy in beheer van die boekhouding bly.
  1. Gee jouself krediet. Kredietkaarte maak dit makliker om tred te hou met jou besigheidsuitgawes, aangesien die state besonderhede van jou uitgawes volledig uiteensit. Kredietkaarte is ook veiliger en geriefliker om te gebruik as kontant.
  1. Gebruik tegnologie. Sekere draagbare toepassings stel jou in staat om jou uitgawes dop te hou en na die korrekte kliënt of rekening te allokeer. Kry produkte wat versoenbaar is met jou bestaande rekeningkundige sagteware.
  1. Monitor resultate. Skep weeklikse en maandelikse terugvoering met jou rekeningkundige sagteware om jou inkomste en uitgawe te monitor. Gebruik ‘n maandelikse, kwartaallikse en jaarlikse begroting gebaseer op spandering in die verlede om jou uitgawes met jou begroting te laat klop.
  1. Sny oortollige uitgawes. Spandeer jy meer as wat jou begroting toelaat? Wil jy ‘n groter wins maak? Analiseer jou uitgawes en begin deur die onnodige uitgawes te sny.

Hierdie artikel is ‘n algemene inligtingstuk en moet nie gebruik of staatgemaak word op as professionele advies nie. Geen aanspreeklikheid kan aanvaar word vir enige foute of weglatings of vir enige verlies of skade wat voortspruit uit vertroue op enige inligting hierin nie. Kontak altyd jou finansiële adviseur vir spesifieke en gedetailleerde advies.