You are wise to watch every penny when starting and running a small business.
Careful cost management can keep your business lean, agile, and resilient through difficult periods. One expense that most entrepreneurs will consider early on is software that can help them run their businesses more efficiently and ensure that they comply with tax and other regulatory requirements.
Given the advances in technology and the competition within the sector, there are a host of accounting and payroll software options for small business owners that won’t break the bank.
That said, we recognise that you might not be ready to make a software investment just yet, so we’ve put together a list of the common pitfalls to watch out for when managing these functions manually.
The purpose of accounting is twofold. First, keeping a record of your business transactions will allow you to identify, measure, and communicate important financial information about your business, which is necessary for growth. Second, SARS requires you to keep such records to justify the tax you pay.
Making errors in your accounting can, therefore, undermine how your small business is run and result in costly non-compliance penalties from SARS. Here are some of the common errors that come with manual bookkeeping:
Your business is required to pay provisional income tax every six months in addition to the annual tax return due within 12 months of your financial year-end. If you’re a registered VAT vendor, you’ll need to submit a VAT return either monthly or every other month. And if you happen to sell high-volume consumable products like petrol, cigarettes or alcohol, you’ll also need to submit excise duty payments every month. It’s a lot to remember.
The reason business owners often miss these deadlines – incurring late submission penalties and irking SARS in the process – is because they underestimate how much time it’ll take to get their books in order manually. It’s advisable to put a recurring reminder in place for the submissions you need to make so that you have ample time to collate the necessary documentation.
TIP: Immediately scan or take pictures of invoices and receipts for business-related expenses and drop them into a folder so you don’t waste time searching for them later.
For most entrepreneurs, updating their books always comes second to running their businesses. As a result, they often find themselves punching numbers into a spreadsheet after a long day or in a rush to meet a submission deadline. Fatigue and haste are the primary culprits of human error. And once inaccuracies creep into your recordkeeping, you’ll need to spend precious time pouring over columns and rows in search of those errors. Inaccuracies in your tax returns can also lead to SARS rejecting your submission, which means more time wasted and an increase in the likelihood that they’ll call for an audit of your business. And you don’t want that.
TIP: Block out a morning in your calendar, ideally every week, to update your books. You’ll be fresh and less likely to make mistakes, and the frequency will make the task less daunting.
Poor cash flow management
Many a small business has run aground on an empty bank account. To be sure, lumpy revenue generation is to be expected in the early years. That’s often the nature of the beast. But making sure you get paid as quickly as possible for the work you’ve completed is a non-negotiable if you want to avoid cash flow problems.
An inefficient invoicing system is a potential threat in this regard. Invoices that are either tardy or contain errors will delay payment, putting unnecessary pressure on your bank balance, not to mention the stress that comes with paying your suppliers late. Efficient invoicing also leads to a more accurate accounts receivable balance, which gives you a better idea of how your business is currently doing. This is important when making decisions about, for example, which projects to take on or how much inventory you should buy.
TIP: Where possible, make sure that every customer is aware of and signs off on your payment terms and conditions. This will improve the predictability of your cash flow, assuming that you invoice timeously!
Even if you’re a one-person band, to begin with, you likely have aspirations to grow your business and employ other people to support you. Indeed, providing employment is one of the more satisfying elements of running a successful small business.
The purpose of the payroll function is multifaceted: it must streamline the payment of employee salaries and bonuses, make the necessary deductions from their remuneration in provisioning for PAYE tax and the statutory contributions such as UIF and SDL, and incorporate any medical aid and/or retirement fund contributions that may be applicable.
The most common mistakes made in the management of the payroll function are:
Incorrect capturing of employee information
For your business to remain compliant with SARS regulations, you must maintain accurate information about your employees concerning their fixed information and their remuneration information. It’s also critical to safely collect and store employee information per the Protection of Personal Information Act (POPIA).
Something that is often overlooked is populating employee records with information about their performance at work. If positive, you can use the data when putting together bonus packages or when considering an employee for promotion; if negative and disciplinary action was needed, that record is vital in protecting your business against any litigation that the employee might bring.
TIP: On an annual basis, send each employee the information you have for them on record and get them to verify its accuracy.
Late payment of employees
As your business grows, its success will become increasingly reliant on your employees’ behaviour and commitment. If they feel appreciated and looked after, they will do the same for your customers and your business’s bottom line.
If you choose to pay them manually, be sure to put a reminder in place each month so that you pay them on time. Ideally, this should happen on the same day each month so that your employees know when to expect their salaries, allowing them to plan their finances more effectively.
TIP: Create a template for each employee that automatically calculates the deductions/statutory contributions that need to be made from their total remuneration so that changes in their pay (overtime, for example) can be handled easily. Consult a payroll specialist if need be.
Falling behind law changes
The regulatory landscape that encompasses the payroll function is complex, partly due to the ongoing industry and legislation amendments. When handling your payroll manually, it can be challenging to keep up to date with these changes, potentially rendering your business vulnerable to non-compliance issues.
TIP: Do some research on where to find reliable payroll tax and labour related legislation updates. Until the pandemic is under control, industry conferences are unlikely to be held, so look out for webinars that discuss similar content.
Make it routine
Small businesses can take a manual approach to handling their accounting and payroll functions, but there are risks. Your best shot at avoiding the pitfalls is to put reminders and systems into place that encourage you to routinely update your books, ensure that your employees are paid on time and submit your tax returns as well as submissions to the UIF on time.
If you can keep both SARS and your people happy, your business will have a better chance at success. And when you’re ready, there’s software available that can further reduce risk, increase your productivity, and take your business to the next level.
Quick start guide to Payroll Tax Year-End
We understand your day-to-day challenges; which is why we want to try and make your business life easier. We’ve prepared this guide to help you work more efficiently, giving you more time to do what you do best – run, manage and grow your business.