Small Business Accounting

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 vs bookkeeping

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.

The basics of bookkeeping

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:

• Setup a bank account for the business. By using a dedicated account for all of your business transactions, you will be able to accurately separate income/expenses between the business and your personal finances.
• Keep records of your income. When you perform a service or sell a product, you will send an invoice to the customer. Keep these invoices organized and check your bank statement each month to ensure that you are paid for what was sent. Alternatively, if you run a retail store and use a Point-of-Sale (POS) system to take orders, you can download the sales and do a analysis from there.
• Keep records of your expenses. Store your receipts and invoices. Be sure to track what each expense was for. Because things can get lost easily, try storing these digitally in a dedicated folder on your laptop/computer, or snap a picture of your receipts and keep them on your phone. Some apps and accounting software can automatically read the data from your pictures of receipts – making record-keeping much easier.
• Get a bookkeeping/accounting software as soon as possible. Modern bookkeeping software automates much of the recording and report-generating process.

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.

The basics of accounting:

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:

• Your Balance Sheet (BS) statement: summarizes your assets (what the business owns – e.g. cash, building, equipment) versus what it owes (it’s liabilities – e.g. loans or credit overdraft). A snapshot of the financial situation.
• Your Income statement: summarizes your income/revenue verse expense to display if you’re generating money. Also known as a profit and loss (P&L) statement. Did I make any money last month?
• Your Cash Flow (CF) statement: reports cash inflows and outflows for operating, financing, and investing activities. Indicates if you have changes in cash position over time.

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.

When/Why do I need an accountant?

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:

• Save time. Instead of preparing and reporting on your business’s finances, employing another professional party to do so can save you considerable time (and money).
• Objective advice. When starting a business, it’s useful to have an accountant review your idea/business plan. They can help with financial projections and budget-setting.
• Advice on company structure. Sometimes it’s better to register the business in a certain way depending on the functions being performed. Accountants can answer these questions with ease.
• Company compliance: Entrepreneurs are often so preoccupied with running their business, that they neglect their financial affairs, miss tax deadlines or CIPC compliance requirements. An accountant will keep you in line.
• Manage payroll: As an entrepreneur, you’re responsible for a lot. Paying your staff, accounts and SARS, accurately and on time can be frustrating and admin intensive – using an accountant can alleviate this stress.
• Applying for funding: Most funding institutions like banks and government will require that your business has an audited (clean) set of management/financial accountants. An accountant will be able to assist you with this preparation.
• If you deal with tenders: If your business does/intends to sell to government or big corporates, it is important that your financial affairs and management accounts in order.

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.

When/What do I consider for tax?

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.

Other important definitions:

• Profit: Total revenue less expenses, for a month or year.
• Cash Flow: The summary of a business’s cash position. Gauge of cash inflows & outflows. Cash flow can be accounted for in operations (day-to-day activities), investing (buy or sell and asset for cash) or funding (if a business raises or pays back funding).
• Assets: What your business owns. Assets are resources used to produce revenue. Current Assets are cash and assets that will be converted to cash within 12 months (inventory, accounts receivable, investments). Non-Current Assets will only be converted to cash in 12 months or more (fixed assets like property, or intangible assets like trademarks).
• Liabilities: Amounts your business must pay other parties. Liabilities include accounts payable and long-term debt. Current liabilities are payable within a year (like accounts payable, short term loans), while Long-term liabilities are generally payable in a year or more (bond on a property, or long-term loan).
• Equity: Equity is the difference between assets and liabilities, and you can think of equity as the true value of your business. Equity includes initial cash/asset investments, stock/shares and profit. The difference in current assets minus the current liabilities is also known as “working capital” – the capital used in its day-to-day trading operations.
• Accounts Payable: The amount you owe suppliers.
• Accounts Receivable: The amount that your customers owe you after buying your goods or services on credit.
• Accrual Method: accounting for revenue and expenses when they are incurred. Gives us the most accurate picture of income and it ignores the timing of cash inflows and outflows. Matches revenue with the expenses that relate to producing the revenue.

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