Tag Archives: management

Why Most Partnerships Fail

It is often recommended that budding entrepreneurs consider partnerships to establish strong businesses. It is seen as a solution to the ills that befall the “one person”, show. Different skills are combined when are partnership is forged.

Many successful partnerships have been going for years, especially in legal, accounting and medical firms. And businesses benefit greatly from the diversity of skills, as well as the injection of capital.

Unfortunately it is not all smooth sailing. For smaller firms, a substantial amount of partnerships have turned out to be nothing, but disasters. No binding partnership agreement, nor any other amount of counselling or consulting will save a partnership if it starts to unravel.

Business Partnership divorces can be even more traumatic and stressful than a marital divorce. Prolonged, subsequent court battles also takes its toll on the affected individuals.

Unlike bigger firms, partnerships in smaller businesses come about,almost always, as a result of friendship and family relations. Its with this “taking on”, of friends and family, where most of the problems lie.

SCENARIO 1

An established sole proprietorship business, decide to appoint a partner. This partner has never worked in the business since its inception. He is nevertheless, elated to part own a business.
Of course, the new partner is entitled to a salary and demand all the other perks that comes with running a company. When the partner learns that he must forgo his total or part of salary in tough times, the tension starts to mount, inevitably leading to a collapse of the partnership.

SCENARIO 2

A business owner is approached by an “influential deal maker with all the corporate or government contacts”. Out of desperation for business, the current owner gives the deal maker a share of his business. But as months go by, no new business transpires. But our new partner demands a salary and perks. Conflict erupts and that spells the end of the partnership.

The two scenarios, above are not exhaustive, but just two examples of typical, causes of partnership break ups.

In most, but not all, partnerships are people who want the benefits, without the responsibility that goes with running a business. Since we are social beings, we want to extend that friendship into our business lives. Beware, nothing destroys a friendship, like a business relationship, gone sour!Running a business is stressful and demanding, dont add to the pressure by taking on a partner,who cannot handle these challenges. Develop a management team, and delegate, but retain your equity in the company.

It is a fallacy, to think that you need a partner in your business to make it a success. Yes you need help, but does it really warrant taking on a partner?

Take on a partner as your very last resort, when you close to retirement for instance.

 

Tax Planning for the Small Builder or Contractor

The failure to plan for tax prior to a business being formed leads to inevitable tax problems that could so easily have been avoided, have the contractor considered reading widely.

 

The legal structure for the building business is crucial. Many builders (and other types of businesses) are oblivious of the impact taxes have on the type of legal entity considered. There are three popular types of legal entities. I.e., the close corporation, the PTY (Ltd), or the sole proprietor. More on how taxes affect these entities later.

 

a)      Compulsory Taxes and registrations.

 

On establishment of the business, there are some compulsory taxes and statutory matters the business will have to register for.

 

 

  • If a CC, Income Tax. Or the Income tax number of the individual(s), for a sole 

      proprietorship or partnership.

 

  • Value added tax (VAT), but only if the business generates more than R1million per month turnover (R84 000) per month. Or voluntary registration if a minimum of R50 000 per annum can be proven.

 

  • Whether the business employs people or not, Pay-as-You-Earn (PAYE), tax remains compulsory. So if you the sole owner/director, you remain liable for tax.

 

  • The PAYE returns are submitted monthly, and VAT bi-monthly.

 

  • Register any employees at Department of Labour for Unemployment Insurance.

 

  • And importantly for the building industry, Registration for Occupational injuries (WCA), also remain important.

 

The tax rate for companies is currently 28% of profits. But SME Contractors can qualify as Small Business Corporations, which entitles them to a reduced rate of 15%!

 

 

b)      Legal Tax savings

  How to maximize taxes.

 

  • Building contractors can use capital allowance on the equipment that they own.

Example:

Company A generated a profit of R40 000, and did not use allowances, so it was compelled to pay (R40 000 X 15%)=R6000.00 tax.

Company B, also generated a profit of R40 000, but valued all their assets/tools and arrived at a value of R80 000. The allowance wear and tear is about 25%. Plus they took advantage of s12B allowances, which entitles them to a 50%, write off on equipment. Calculation (R80 000X25%) =R20 000+(R80 000X50%)=R40 000, Total R60 000.

 

All taxable profits (R40 000-R60 000), were wiped out, and the business owes zero tax!

 

 

  • Vat input on all equipment purchased once off, is also claimable.

 

 

If you cannot be guaranteed regular income, it would be advisable to remain a sole proprietor. There are advantages to this. A company will be taxed separately from its owners. So even if the company benefits from tax savings the owners still have to pay tax. If you a sole proprietor however, you can benefit from tax savings in your business, since these savings will be off set against your personal income.

 

 

a)      Tax Clearance and compliance certificates.

 

It is important for contractors that consider doing business with the state, to have a tax clearance. A tax clearance is obtained from SARS, and basically states that your business taxes are up to date.

 

For workers employed by your business, a certificate from the Department of Labour for Occupational Injuries, also have to be obtained.

 

In Some cases, businesses also have to be registered at the Building Council.

 

 

b)      Conclusion

       To comply with all of the above, a proper administration should be in place. Or 

        the contractor should opt for a skilled accountant or tax practitioner!

 

 

Sean Goss

Tax Advisor

www.sgafc.co.za

 

 

 

Small Business Management, A Balancing act- Part One

So you have taken the plunge, and embarked on the painful, yet rewarding journey of starting you own business. With so many books on small business management, and advisors offering help, what do you do? As always the answer is never straightforward, but here is my humble contribution, to these vexing small business management questions.

 

 

 

Managing a business, is an exceedingly difficult exercise, as all small business people, only discover, after having established the business. For the most part, business management is a balancing act.

 

 

 

Allow me to expound on this balancing act. If a plumber quits his normal job, to go into self-employment he will be an expert in his chosen field, and remain confident that the money will roll in. Later on, he runs into cash flow problems, customers shortages etc. He then comes to the sobering realization, that business is not the bed of roses he thought it would be.

 

 

 

A small business owner concentrates at what he is good at, i.e. computer services, building, carpentry etc. But any business, no matter, how big or small needs an admin department, and an operations/production department. No matter how good you are at what you do, if you lack certain skills and competencies in administration, you business will constitute part of the 75 to 80% small business failure stats. 

 

 

 

You might create a workshop for you product and services, but do you have a proper administration department? Businesses collapse due to a lack of proper administration.

 

Here the balancing act comes in. Divide time equally between your administration and operations duties, as a small business owner.

 

 

 

Many new business owners cannot grasp the fact that an inadequate administration department leads to eventual business failure. This compels me to provide numerous examples to my clients.

 

Here are some to ponder on:

 

 

    • A potential customer sends you a fax or an e-mail requesting a service or product. The fax or e-mail goes missing. By the time you have located the e-mail, the potential customers have gone to the competition.

 

    •  You don’t maintain a customer list or e-mail list. You have many products and services to offer, but customers don’t know about it! You lose business.

 

    • You don’t maintain records on how much your customers owe you, and is therefore not in a position to collect.

 

    • You’re phones go unanswered, or messages are not noted from prospective clients.

 

    • Inadequate stationery (no business cards, letterheads with contact info)

 

  • You don’t maintain proper books of account, so spending and income patterns are not monitored, leading to stock and /or cash losses.

 

 

 

Jack up your admin department, to the same level of your operations department within the first three months of your new business. I am not suggesting you spend less

time on operations, only equal time on administration. That is a good start, but the balancing act  between admin and operations department goes much deeper. 

Small Business Management, A Balancing act- Part Two

As depicted in part one, business management is about balance between your admin department, and your operations department (your service or product). Both departments are equally vital your business’s survival.

 

More sub-departments, however, are necessary to ensure the efficient running of your business. The hard work, and even the fun, really kicks in when sub-departments are established. These sub departments, are not mysterious. They well known in business, but rarely implemented. It’s just that small businesses assume that only big business needs them.

 

Admin sub-Departments:

  1. Office Management: Office furniture, computer equipment, printers, faxing, correspondence, e-mail, incoming and outgoing mail, filing and storage, legal/contracts.
  2. Human Resources: Staff requirements, hiring and firing. If the business is very small this department can fall under office management.
  3. Marketing: Central files of clients, prospects, ezine publishing, e-mail lists and  auto-responders. Website, Advertising on and of-line.
  4. Finance: Bookkeeping, taxes, debtors, creditors, banking, cash management.

 

 

Operations sub-Departments:

  1. Production: The main product or service of the company.
  2. Quality Control: What is the quality of the service we render? Do we check products prior to delivery. Are clients called to verify their satisfaction?
  3. Training: If staff lack core skills, mistakes are inevitably made, which could cost your business thousands. Regular courses, internal training, and even further college studies might be needed.

 

If the preceding sub departments are in place, no further departments are necessary, be it a business with 1 owner and employee or a company employing 20 000 people.

Would additional staff be required, to run these departments for a very small business?

No additional staff  have to be employed, the owner wears different hats, in different departments. Divide time between all departments.

 

As the business grows one employee can take up, a position as “Operations Manager”, overseeing the three departments under him/her. A competent secretary can become “Office Manager” , later on she/he can assume the “Admin Managers” position.

 

Small business owners are normally bogged down in Production and Finance, to the detriment of all other relevant departments. Your excellence in your product means nothing if the product is not marketed (marketing department), you cannot market, if no proper contact or e-mail lists are maintained, (office management). And if you have a office, you market extensively, and manage your finances well, you will lack capacity without training for yourself or employees (training department). All

departments are inter linked, and equally important, whether you big or small. No getting away from that.

 

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Net Asset Value Or Business Value-Not The Same Thing

Accountants always seem to get lost in the valuation of a business. Whilst this is understandable, it can create problems when a business is sold. Even the Discounted Cash Flow method of valueing a business can be misplaced.

Net asset value is simply the assets, minus liabilities of a business. Businesses are sometimes sold using this value, Whilst few and far between, it does happen. Net asset value is more applicable for tax purposes, but is never a fair indicator of the intrinsic value of a business, albeit an important component.

Some businesses are worth much more than their assets on their books. Take a small fashion designing business for instance. The assets in the business, might be less than $10 000.00, but the value of its owner cannot be quantified in monetary terms.

The discounted cash flow method of business valuations is a more realistic method of calculating the value of a business. Formulas used in this method however, still overlooks the essential components such a skills and talents. Some accounting policies are in place to measure intellectual capital, but remains vague in its application. Copy right and patent laws cover intellectual property, but it still remains difficult to quantify in monetary terms what an individual is worth to a business.

In accounting an employee salary is recorded as a cost, and not an asset. So the loss in income due to a loss of human capital is never measured, only noted. Are employees, costs or assets or liabilities(many are liabilities)? For the most part employees add value to a business.

Does the location or appearance of a business add value? Of course it does. Being located close to banks, corners and parks makes a big difference. A neat tidy appearance of an office also attracts customers. A receptionist with a friendly smile will keep your clients coming.

These aspects should make a big difference when it comes to establishing a true value of a business. Costs have absolutely nothing to do with TRUE value.

 

 

Contact the Author
Sean Goss
sgafc@mweb.co.za

Marketing and Sales, a money game, not a numbers game.

Businesses die, if they fail to market, that’s a given. Surveys, worldwide reveal that small businesses overlook their marketing, leading to business failure. Less than 20% of the small businesses efforts, are directed towards marketing.

 

Degrees in marketing are offered by all business schools at colleges worldwide. A small business owner however, lacks the time or resources to enroll for a marketing degree. Small businesses also cannot afford the salaries that marketing experts demand. Market research companies also do not come cheap. Courses and seminars from time to time help, but marketing is a neglected area for small businesses.

 

Fortunately many marketing opportunities are becoming accessible, and cheaply available for small business. The Internet especially has opened many doors to small business. Particularly in website promotion, and e-zine publishing.

 

Business owners should be aware, that website traffic, enquiries, e-mails are not enough if it cannot be converted in to sales. Also closing 5 to 10 deals a day, and creating a wide customer base is useless if these customers do not pay.

 

The quality is what counts, not the quantity. In desperation for business, products are sold cheaply, to attract customers. I concede, at the beginning prices should be reasonable, but don’t keep prices low forever, gradually increase prices as customers increase.

 

I recently consulted with a client, who was stressed and tired due to a project that required him to produce 300 items at $150.00 each. Total sales generated would be $45000.00. The client needed the cash, so I did not blame him. He completed the project and I advised him to refrain from a project of this nature in future. He was flummoxed, but I offered another strategy. Using the same target, of $ 45 000, I recommended that he rather take on fewer projects of about 30, but charge a price of  $ 1500.00. The product would be related, but totally different. The client opted for niche products, with higher prices. He now generates $ 60 000.00, $15 000, more than the $ 45 000, for less work!

 

Any business in crises, considers more sales as the solution. Sometimes it is. But how many businesses, mine their e-mail lists, or maintain an active file of existing clients. You can market more effectively to existing clients than new ones. Newsletters to existing clients are lacking in most small businesses. No driving, no telephone calls, just a newsletter as an attachment with that e-mail, or on delivery of that product.

 

Why should the same errant, late paying customer be serviced? Customers, who cannot pay, do not belong on your books. Compile a list of your most loyal, paying customers, and rather offer him/her more products. No one wants to lose customers, but it is just not worth the effort to retain a non- paying customer.

 

 

Having many customers that keeps you busy is good, but it is better to have fewer, quality customers, that ensures that the bills are paid.

 

Author: Sean Goss  sgafc@mweb.co.za

 

 

Finding The Ideal Accounting Firm For Your Business

The services of accountants are becoming more expensive and scarce. Many medium to large accounting firms around the globe have collapsed due to disciplinary procedures and blatant corruption. Innocent businesses lost their accounting firms due to investigations from authorities into malfeasance related to other corporations.

 

The admission to the industry is becoming tighter, with rigid exams, and even harsher requirements for practicing accountants and auditors. The pool of available practicing accountants is becoming smaller as a consequence of   regulation.

 

It is nevertheless, not impossible to find the ideal   firm. I emphasize, firm, not an individual accountant. Respective bodies stringently control an accountants advertising, but most of them are not precluded from advertising in the Yellow Pages or newspapers.  A website for an accountant is the most viable form of advertising. So if you search through your Yellow Pages, newspapers or a search engine on the web, you will find a number of firms offering their services to the public.

 

Follow this guideline when selecting your firm.

  • If you a small to medium business, identify a small to medium firm.
  • Opt for a firm or company that is registered. The number of partners is immaterial.
  • Professional Practice/office. Offices with proper infrastructure, such as modern computer equipment, software, fax machines, telephones, and Internet and e-mail facilities.
  • Library. Does not have to be a huge library, even a bookcase with relevant reading material on tax, GAAP, labor, will suffice. This  indicates that the firm keeps up to date with legal developments.
  • Archiving. Proper storage facilities for your documents and files.
  • Working, permanent and operational files, is a good yardstick to gauge professionalism.
  • Skills. Are the partners indeed skilled and qualified to render the services advertised?
  • Scope of services. Accounting, tax, business advice, valuations, investments, auditing, negotiation and other financial services under one roof.
  • References. Check references with existing or previous clients of the firm.
  • Pricing. Fees   vary, but compare fees to the quality of service  and swiftness in delivery of assignments and projects. If you happy with the service levels be prepared to pay the fees, excellent service, comes at a price. Rather negotiate rates, than to opt for a cheaper firm.

 

A professional firm will prepare an engagement letter(“agreement”). Insist on such an agreement before mandating the firm for work. Such an agreement should clearly stipulate the kind of services offered, the rate and terms. This agreement can also address potential disputes.

How Accountants Can Help You Beat The Recession

The difficult economic conditions, foisted on business by fuel and food price increases have compelled many big and small business to slash expenses.

Accounting services are one of those “unnecessary” expenses that a business will target in their crisis budgets.

 

The irony is, that in times of economic hardships, accountants are needed more than anything ever. The saddest ramification of the “economic crisis” is that business people are now just sitting on the behinds, complaining and doing absolutely nothing about their plight. Little positive action is taken to solve problems creatively.

 

For the first time in years, accounting firms are under severe pressure, not only due to the economic conditions, but also due to a host of regulations and laws that has been promulgated, to clean up the industry. Accounting firms are compelled to toe the line, and apply high standards in their work.

 

So clients can rest assured that they would find accountants whom are: a) desperate for your business and b) compelled by law to behave and act ethically.

 

Using a professional accountant will assist you in the following ways to beat the recession:

 

  • Budgeting

Drawing up a budget for both your business and household income and expenses.

 

  • Cash Flow Management

Cash flow management in these difficult times is the main factor that will make a break a business.

 

 

  • Tax Planning

No business or individual can afford to be negligent with his or her personal and business taxes. Every cent counts. An accountant can assist you to find all those legal loopholes that can benefit the individual or business financially from a tax perspective.

 

  • Debt consolidation and restructuring.

Re-financing assets and consolidating debts in one financed asset, either through a second mortgage, or re-financing of machinery.

Accountants can also restructure your debts, in conjunction with your creditors. They   possess the “Insider knowledge” of your business finances.

 

  • Reports

Reports such as financial statements, cash flow forecasts and budgets are vital for the business, if the business is going to re-structure its affairs. The financial institution will require these reports, when   finance is provided.

 

  • Improving bookkeeping

Since money is tight, record keeping of all expenses will have to improve drastically. The accountant can assist in cleaning up messy books, and track fruitless expenditure, thus saving the business substantial sums.

Accounting fees may be considered a “luxury”, to business, and that is understandable, but every business should put an accountant to proper use in these harsh economic times