When starting a business, the idea of accounting and bookkeeping is intimidating for most entrepreneurs. Unfortunately, this means that most neglect investing the time to understand the accounting requirements of their business. Now, we’re not suggesting that you become a fully competent technical expert (that’s what professional accountants are qualified to do). But it is important that you familiarize yourself with a few basic concepts in order to understand what tasks, process and record-keeping you’ll need to implement in order to function effectively and compliantly as a business.
Accounting is the process or system of summarizing, analysing and reporting financial transactions pertaining to a business. It is an important function for directors, shareholders and regulatory organizations like the South African Revenue Service (SARS, for the purpose of tax). Bookkeeping is the function of actually recording the financial transactions/information of the business and is one of the primary foundations on which the accounting process is built. As stated, accounting then takes this record-keeping further by creating reports for managing the business, as well as using the data to prepare for tax.
To record your transactions, it’s important that you implement an accurate and efficient system. Historically, most businesses did this manually, and accumulated heaps of paper-based records and a physical cashbook. Thankfully, as the world moves more digital – there are now various accounting software products that serve this purpose and make things that much easier.
You may be wondering why bookkeeping is important? Well, the goal of every business is to make money, right? That means that you need a reliable way of understanding what’s coming in (income) and what’s going out (expenses). These numbers are gamechangers for a new business – and good recordkeeping will tell you whether your business is profitable (i.e. making money), how long until you run out of money, if are you aligned to your budget, and most importantly help prepare the business for tax season. Accurate records are also incredibly important for strategy and requirements for further funding.
It’s important to keep tabs on your income and expenses from as early as possible, so consider the following steps as you’re starting out:
Very few business owners take the time to understand what proper bookkeeping and accounting requires. For example, it takes time it takes to complete a recon (reconciliation) each month, where you compare your bank statements to your records (receipts/invoices etc) to ensure that they are accurate. This is an investment, but as the business grows, you’ll find easier ways to do this. It also allows you to stay on top of your finances.
Until you get setup on a bookkeeping or accounting software, it’s useful to print out your bank statements each month and take note of the relevant transactions. These will be easy to digitize once you get setup on a good accounting software. You can also consider investing in POS software if you run a retail store, which can send data directly to many accounting software packages automatically – saving you loads of time.
Once you’re familiar with keeping your records in an orderly and efficient manner, and you have a rough understanding of your cashflow, you’ll want to prepare more formal reports to understand your exact position as a business. Without doing so, it will be hard to formulate an accurate strategy to grow the business in the future. And that’s where accounting comes in. The three most important reports that will give you an accurate snapshot of your business are:
Most online accounting software has the ability to automate those reports, giving you a quick and easy snapshot of where you stand as a business. If you want to consider an accounting software from day 1 (which we recommend in order to streamline your business as early as possible) – check out the getlion mobile app for our recommended choice. If you’re not in a financial position to purchase accounting software, please check out the following free templates from Microsoft: Balance Sheet, Cash Flow Statement and Income Statement.
Firstly, accountants do more than simply “help you with your taxes”. They can play a pivotal part in understanding what your accounting reports are telling you – information that could largely influence your future decisions and strategy for the business. Most businesses consider an accountant an unnecessary expense – and often only consider employing one when it’s too late for the business. Certain factors can weigh-in on your decision, e.g. the older, more complex, bigger client base and limited time available would suggest getting an accountant would be wise. Accountants also add value in other specific instances:
Selling your business – if you intend to sell your business in the future, consult an accountant in order to calculate an accurate value/sale price for the company.
Now before you cringe at the sound of the word tax, take a moment to understand why tax is important. The taxman is not the enemy. In fact, SARS is an important institution in South Africa, as it’s largely responsible for the revenue that the Government can use to reinvest in the country. Tax rates are only high because there is such a low rate of tax compliance (i.e. people/businesses refuse to pay tax or find ways to avoid it). This puts a huge burden on a small portion of the population (and tax avoidance is illegal). The country needs your business to pay your share of tax.
There are three main categories of business tax to consider. Income Tax (the standard tax your business pays to SARS as a portion of sales revenue), PAYE (Pay-As-You-Earn – the tax deducted from your employees’ salaries and paid to SARS on their behalf) and VAT (Value-Added Tax – the percentage of tax added to your sales price, and then paid to SARS later).
Thankfully, your business can claim (recover) a lot of the tax it pays each year through “deductibles” – certain expenses incurred by the business each year in the performance of its primary functions. And this is where accurate bookkeeping is very important – as you’ll need proof of these expenses.
We recommend that you consult an accounting/tax professional at least twice-a-year, once at the start, to guide you around what costs your business can/should account for throughout the tax year (for deductions and compliance, and the second to assist you with submitting your tax return. If your finances don’t permit you to do so, you can still use excellent tools like TaxTim to assist you in the submission of your small business tax return each year.