Text: Steven Cohen. This article appeared in the June/July 2012 issue of Your Business Magazine.
Solid accounting is fundamental to the success of any business.
According to Adcorp, over 440 000 small businesses in South Africa have failed over the last five years and while it’s true that we’ve seen some turbulent times, I bet that even the smallest of changes to the daily routine of these businesses – such as setting aside 15 minutes a day to go over cash flow – could have made a significant difference over the long-term.
The cash statement counts
Over the years I have seen too many business owners that are profit-driven and not cash-driven, which leads them to interpret their finances in a specific way.
For example, it is important to note that an income statement is not always an accurate reflection of your company’s cash flow because it includes outstanding amounts that are due to the business or that the business owes to someone else.
The cash statement, on the other hand, is a pure reflection of the cash in hand at a certain point in time, and this is what counts. Consider your income statement carefully; often a business in economic trouble can produce a very good income statement because of money owed to it. Right up until the day the business goes bankrupt.
Never think of the available funds on your overdraft or business credit card as available cash – it’s not cash, it’s debt. No matter how much collateral a business has, it will fail if you can’t pay the rent, electricity and other fees. To maintain a healthy cash flow you must be prepared to play debt collector, or give someone the task of sending out invoices and chasing debtors on a daily basis. Make sure you know how to read a detailed cash flow forecast, and I say detailed because it’s the small things besides net cash flow, that go unnoticed and lead to big downfalls.
Find a trusted advisor
So you may be a brilliant engineer, interior decorator, chef or entrepreneur, which is why you have your own business. But this does not mean you will automatically be an accounting expert, and getting to grips with some essentials is key. The ideal situation is to have a professional accountant who becomes a trusted advisor – someone who will take the time to explain financial concepts to you and how they will fit in with your business rather than simply pasting the results in a book and forgetting about them. An accountant who is willing to interpret the results and then train you to understand them is a valuable asset.
Even with an accountant on hand, it is still important to take responsibility for your accounting cycles, which are vital to ensure that information is timely and accurate. This is easier to do with accounting software, as it automates the process and produces accurate financial statements at pre-determined periods. This is definitely a better option than presenting your accountant with a box full of invoice slips.
I would recommend investing in yourself and subscribe to a few accounting software courses. You will learn a skill for life and be able to gain first-hand knowledge of your business rather than always relying on someone else.
Even with an accounting programme, managing accounting cycles and regularly keeping records of all financial information requires dedication. Outsourcing is a good solution except that businesses are hamstrung by trying to cut down on costs, especially those in the start-up phase. In spite of this, I would highly recommend hiring or outsourcing to a bookkeeper to manage data entries. If you do hire an in-house bookkeeper, you still need to know enough so that you can double-check the data and make sure it is being done correctly. There is a real danger of your internal accounts being defrauded and an owner who does not understand even the basics is an easy target. Test your bookkeeper’s transparency by allowing someone else to take their place while they are on holiday or taking time off.
Do not be led into temptation
Many business owners are at fault for relaxing after revenues are up and the breakeven point has been reached. I know it’s incredibly hard; when we started Pastel we were very strict about paying ourselves small salaries until the business was on its feet. It’s so tempting to let loose once the break-even point has been reached, but this is where over-indulgence can run the company into debt if cash flow is not monitored properly.
Even though the financial situation might not be as tight as when you first started, suddenly buying new machines, hiring more employees or renting bigger office space can quickly erode the newly-made profits. It’s also not a good idea to mix business with pleasure. Need a new laptop? House need re-painting? So many business owners dip their fingers into the till to pay for household expenses, and it ends up being a chaotic mess. Keep your business finances and your personal and home finances separate. Even if your accountant can wash it over, it is not a good example to set for other employees and makes it extremely complicated to keep accurate track of revenues and expenses.
No need to break the bank
Salaries are usually among the big expenditures on a business balance sheet. Big corporates can afford the luxury of employing highly skilled and experienced workers, but this is not where a small business should try and compete. One thing I’ve learned is that employing the right people is vital to success and it starts with attitude and a good fit with the business culture. If you have this, then skills development will be worth it in the end.
When it comes to hiring, many entrepreneurs are put off by our stringent labour laws. This leads to bizarre methods of hiring and firing often involving expensive lawyer’s fees. Taking time to get to grips with the labour laws will save you a lot of money and hassle down the line.
Another area where smaller businesses will never be able to compete with large corporations is economies of scale, which means bigger businesses can charge lower prices for the same product. Trying to win over new customers with lower prices will be difficult and could severely decrease revenues. Rather focus on gaining new customers with superior service and charge at least the same as other enterprises in your league, but never less.
An area where you could look to save money is by moving to the cloud, or online computing. The availability of online business and accounting services means that investing in complex IT infrastructure is a thing of the past, and many applications can be accessed for free or a small monthly installment. Other benefits of the cloud include outstanding data security, off-site backup and the fact that any changes to the program are immediately available to the user, so a legislative change to Vat or another accounting policy is automatically updated on the system removing the need to buy expensive upgrades.
Staying on track
The best trick to continued financial health is to constantly re-evaluate the return on investment as the business grows. For example, outsourcing may become too expensive so it may become necessary to hire an in-house accountant, or you may find that renting equipment is actually costing more than purchasing it.
At the end of the day, the right mix of an expert accountant, trustworthy staff, timely reporting, and close monitoring of cash flow will go a long way to building a business based on solid financial foundations.
Steven Cohen is a chartered accountant and MD of Pastel Accounting.
Pastel is a leading developer of accounting and business software for the SME market. Visit: www.pastel.co.za.
How to get value out of your financial advisor
If you measure the success of your accountant by the fact that you receive an annual tax refund and aren’t investigated by the authorities then think again. There are four services you should expect your accountant to provide:
1. Asset protection
Once your trading structure is set up you may not need to change it, but circumstances change. You may split with your spouse, fall out with your business partner, acquire assets, alter your risk profile or there may simply be changes in taxation or superannuation legislation that warrant a review. Insist on a cursory annual review of your trading structure. It might be a good time to update your will also.
2. Tax minimisation
Include your personal, and corporate, effective tax rate as one of your annual Key Performance Indicators (KPI’s). All tax minimisation strategies are marginal so don’t rush out to buy yourself tax deductions in the lead up to the financial year-end.
Accountants come in different shapes and sizes: There are financial accountants, statutory accountants, management accountants, auditors, tax accountants, etc. Some types may better serve your needs than others.
There is a fair chance that if your accountant specialises in tax and compliance services then they may not be the best choice for strategic advisory services including strategic planning and review.
3. Statutory compliance
Typically, this includes your annual financial and tax returns. This category could be grouped with the services provided by your tax accountant. Compliance, for the most part, is a necessary evil and isn’t a domain rich with value-adding services. In time, most compliance activities will be either automated or outsourced, if they aren’t already.
4. Strategies for wealth creation
At year-end accountants and licensed financial planners come out of the trees with all manner of wealth creation strategies. They must be aligned with your business strategies and broader financial and lifestyle goals, and not just tax minimisation. Resist the temptation to invest all of your surplus cash in investments. Maintaining a cash buffer to weather the ups and downs of volatile trading and collections cycles may not maximise your return on investment, but it may just avert a heart attack.
Do consider your behavioural and emotional factors because many economic rationalists won’t. Choose wisely, measure success and satisfaction, and don’t be afraid to shop around. I guarantee that if you had three tax accountants prepare your tax returns you would get three different results, but, as I said earlier, tax minimisation is only one benefit and it is a marginal one at that.
Dennis Roberts helps small business owner/operators start, run and grow their business from conception to exit. Visit www.DennisRoberts.com.au.
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