In the current environment of strong economic growth, business failure is often attributed to a lack of proper controls. For instance, one of the most common causes of small business collapse in the UK is poor tax administration. There’s only one motivation for the South African Revenue Service’s (SARS) recent tax amnesty for small business – to get more businesses into the tax net and start tightening the screws on them.
In spite of government’s best efforts to reduce the administrative burden on small business, there’s a daunting amount of paperwork to be done on tax alone: company and VAT returns, PAYE, SITE, skills levy and UIF. SARS has the power to seize assets and even imprison tax defaulters, and for anyone who thinks that’s an unlikely scenario, it’s exactly what happened in Ireland after its tax amnesty. In the US, it’s fully understood that you go to prison if you don’t pay your tax.
Certain transactions a person undertakes, such as selling a house, also trigger SARS checks on tax status. Tax, whether in the form of company or employee tax, is not to be trifled with. Any accountant will advise you to outsource this function to someone who knows what he’s doing, because the consequences of falling behind can be disastrous. But outsourcing is not enough, says Rob Stretch, tax director at Ernst & Young Advisory Services: “You need to personally investigate the obligations of a small business so you can manage your bookkeeper. SARS’ website is a good place to begin: it has a guide for small business and explains all the terms, types of tax and how to register.”
Stretch offers further advice for accounting, whether of tax or otherwise: “Have controls. The simplest and most effective control is to not hand over control of your cheque book and cash to a bookkeeper. Ensure you sign every cheque for it to be valid: the only way a person can commit fraud is if he has unfettered signing power.”
To grow a small business is one of the greatest challenges facing any entrepreneur. Organic growth is slow, and in a fast-growing economy that may mean missed opportunities. Sean McPhee, director of transactional support at Ernst & Young Advisory Services recommends that even small businesses should look at acquiring other businesses to accelerate growth. Strategy is something that entrepreneurs seldom consider because their interest is primarily fixed on monthly income. But McPhee suggests that entrepreneurs take the time to plan ahead and prepare for a future acquisition by ensuring that accounts are in good order, controls and compliance are in place and a business plan exists to present to a bank for funding of an acquisition. And, as an acquisition typically means relinquishing some control, have an exit strategy.
This latter point is seldom considered at all, but should be part of any strategy. Not every entrepreneur wants to establish a business to leave to his children: some want a quick entry and exit, and preparations should be made from the outset for a trade sale, disposal to a black economic empowerment operation, or a listing on the
JSE’s AltX board.
Human resources and payroll are often the first functions to fall behind in a business and should therefore be the first outsourced. Wendy Smith, a director at Deloitte, says it is onerous on the business owner to maintain software for payroll and tax returns. “The onus is on the employer to deduct the correct tax on employees, and pay it by the 7th of each month. Failure to do so attracts a 10% penalty for even a single day, and interest.” Another common failure of small businesses is the paperwork related to disciplinary procedures. An employer may scrupulously apply the law when dismissing someone, but in the absence of substantiating paperwork, may lose a CCMA case. And many people take their case to the CCMA .
“Poor human resources (HR) administration can cripple a business as surely as business issues,” she adds. Small firms often don’t warrant a full-time bookkeeper, and the practice today is for most such firms to outsource payroll. The advantage of using a professional accounting firm, rather than a home-based bookkeeper, is that they remain abreast of the huge volume of changes in tax legislation (sometimes as much as 300 pages a year). With 70% of larger firms not knowing how to measure staff performance, it’s no surprise that 80% of small firms are in the same boat: they have no talent management scorecard of any kind, and 60% have no formal plan to grow and retain talent. Yet statistics suggest it costs more to recruit a skilled employee than to train one.
Small accounting firms do provide this service, but in view of how critical talent is to a small, service-orientated firm, HR practitioners suggest that the business owner himself should develop a measurement scorecard and expertise in this area. A full job description should be developed in conjunction with the employee, with measurable performance indicators attached to each point.
Take note of these important pointers:
- A business plan exists to present to a bank for funding or for an acquisition. Because an acquisition typically means relinquishing some control, have an exit strategy.
- Plan ahead and prepare for a future acquisition by ensuring that accounts are in good order, controls and compliance are in place.
-Have controls. The simplest and most effective control is to not hand over control of your cheque book and cash to a bookkeeper.
- Ensure you sign every cheque for it to be valid.
- Poor tax administration. Despite Government’s best efforts there’s a daunting amount of paperwork to be done: Company and VAT returns, PAYE, SITE, skills levy and UIF.
- Human resources and payroll is often the first aspect of a business to fall behind. Consider outsourcing.
- Watch the paperwork related to disciplinary procedures. An employer may scrupulously apply the law when dismissing someone, but in the absence of substantiating paperwork, may lose a CCMA case.
- The business owner should develop a measurement scorecard for employees and expertise in this area.
A full job description should be developed in conjunction with the employee, with measurable performance indicators attached to each point.
