Here are some financial mistakes small businesses can avoid before the holiday season

By Viresh Harduth

The stakes are high for South African small businesses following the challenges of the past 18 months, which now includes a potential risk of a fourth wave of Covid-19 infections later this year. This is a time when you want to avoid making unforced financial mistakes to replenish cash reserves and restore levels of profitability.

Recent research from Sage has revealed that small businesses in South Africa have admitted they are not well prepared for a pandemic and are now determined not to get caught again. Some actions they take to increase their resilience include reducing operational costs (82%), improving workforce management and motivation (80%), and adopting new digital technologies or capabilities (77%).

To this list I would add a tighter financial discipline to avoid unnecessary financial mistakes. Here are four common financial mistakes small businesses make and how you can avoid them.

1. Failing to keep accurate financial records

At the start of a business’s life, you can store your invoices and receipts in a leveraged arch file and use a spreadsheet to track your transactions. However, as your business grows and the number of transactions increases, this manual approach becomes a recipe for chaos. It becomes difficult to budget and forecast or manage expenses and assess profitability.

Make the right choices

Today, small business owners can easily afford an online accounting solution that can accurately record every transaction, send invoices to customers, and track inbound and outbound payments. The software can help you generate reports, manage cash flow, and create budgets and forecasts, so you always know what’s going on in your business.

2. Manage your business from a personal bank account

If your business is small and new, you could operate it as a sole proprietor rather than a registered company. This is not a problem, as it helps reduce administration and accounting costs. However, it is not wise to use the same bank account for your business as for your personal affairs. It is therefore difficult to separate personal and professional costs at the end of the year.

Make the right choices

You need to open separate personal and business bank accounts, which will make it much easier to separate and accurately report business expenses to SARS when filing your tax return. It will also help you better assess the profitability of your business and track your personal income and expenses.

3. Splash unnecessarily

In difficult economic times, it is essential to control your expenses. Even if you imagine that your business is well capitalized, it’s all too easy to quickly spend a lot of money without having much to show. If you are in an industry affected by the pandemic, it may be a good idea to re-evaluate running expenses like office expenses to make sure they are sustainable.

Make the right choices

Use your budgets, forecasts and business plan to guide your spending. Take a closer look at each expense and ask yourself how it helps you generate or save money. You can also reduce risk by avoiding long-term financial commitments. For example, rather than hiring a full-time marketing assistant, outsource to a freelance writer or use a coworking space rather than signing an office lease.

4. Not controlling your tax obligations

Each year, you will need to file your personal and business income tax returns and have the money to pay for SARS on time. You’ll want to make sure you’re claiming all legitimate tax deductions, that your VAT and income tax returns are accurate, and that the payment won’t hurt your cash flow or put you in debt.

Make the right choices

You should consult a financial professional to understand your tax obligations and file the correct returns within the appropriate time frame. Watch government communications such as the finance minister’s budget, usually in February, to learn more about new tax regulations for the year. Use your accounting tools and your accountant’s advice to make sure you’re well prepared for tax season.

Don’t let mistakes get you down

Most small business owners make a few financial missteps along the way. The key is to learn from these mistakes to avoid repeating them. Planning your budget, tracking your income and expenses, and helping an accountant can help you avoid making bad financial choices and keep your business on track for steady growth.

Viresh Harduth is Vice President of Small Business at Sage Africa and Middle East

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