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The definitive guide to accounting and compliance for entrepreneurs

Published March 5, 2020

If you are an entrepreneur and small business owner and you don’t know where to start regarding your business’s accounting and finances, you are not alone. 

 

 

 

Taking accounting seriously from the beginning is often the difference between a business being successful and having to file for bankruptcy. This is why Osidon has put together an accounting and compliance guide for entrepreneurs. 

 

 

 

This blog post will help you understand why accounting is compulsory for entrepreneurs, how to use accounting as a tool for growth, the accounting skills all entrepreneurs need as well as how to ensure your business is compliant. We look at cloud accounting and the benefits of cloud accounting for your business. We also offer advice on choosing the right accountant/accounting firm for your business. 

 

 

 

This article will help you make informed decisions regarding your business’s accounting needs. 

 

What does accounting entail?

 

 

 

Accounting entails all the financial and compliance aspects of your business. 

 

 

 

If done correctly, accounting is critical to help your small business succeed by giving you insights into the overall financial health of your company, offering a precise report of your cash flow, demonstrating opportunities for growth and keeping you organised and accurate when filing your taxes.

 

 

 

Regardless of the size of your business, accounting is an unavoidable function for decision making, cost planning, and measurement of economic performance measurement.

 

 

 

Accounting activities include, but are not limited to, the following: 

 

 

  • Bookkeeping and financial reporting and reconciliation 
  • Tax returns and tax structuring 
  • Companies and Intellectual Property Commission (CIPC) returns
  • Department of Labour and compensation fund returns
  • Managing and improving cash flow
  • Compiling annual financial statements, management reports and management reviews
  • Overseeing payroll 
  • Auditing 
  • Business advice and support 

 

 

As a small business owner you can choose to oversee your business accounting on your own, or you can hire a registered accountant to help you set up your business, prepare financial documents, manage payroll processes and file taxes. They will also remove or automate administrative tasks that distract you from your core business.

 

 

Why accounting is critical for entrepreneurs  

 

 

 

If you are looking to move forward in the business world as an entrepreneur, you have to understand and be able to manage your business’s accounting and finances. 

 

 

 

In the early stages of a business, entrepreneurs are often responsible for many different business functions as they may not have the funds to hire an accounting firm. Accounting is more important for a startup entrepreneur to understand, given the many roles entrepreneurs will be responsible for during their business's growth. For this reason, entrepreneurs must understand the financial aspects of every part of their business dealings. 

 

 

 

You don’t need to be an accounting expert to run a small business, but you’ll want to have the basic accounting skills in your back pocket to make sure your business runs smoothly and is on track to make money.

 

 

 

Even when a business grows to the point where an entrepreneur can delegate responsibilities to employees, a solid understanding of how each department functions financially is necessary to measure performance.

 

 

 

Successful businesses rely on competent and solid accounting. The success of your business depends on the planning and tight management of budgets, balancing your books, and revising your financial strategies as necessary. 

 

 

 

Accounting is a part of every aspect of business management, from large business loans to small business grants, product manufacturing and distribution costs to marketing campaign budgets. 

 

 

 

Forbes argues there are three reasons entrepreneurs need accounting and financial experience:

 

 

  • To make predictions about the future

As an entrepreneur, you need to make predictions about the future to ensure you continue to provide a niche product or service to your clients and customers. If you have employees, solid predictions will assist you in creating a shared vision and a common goal to work towards. Accounting and finance give us analytical tools to make projections and to link what we expect to happen in the future. In the early stages of a business, projections provide concrete, measurable, and actionable steps for measuring progress.

 

 

 

  • To help you make more effective commitments of time, energy and money

Entrepreneurs make commitments in order to build capacity to service future demand and to invest in assets that will lower operating costs.  You have to make commitments of time, energy, and money to assist you in providing a high-quality product or service your customers need. Proper accounting is key to making sound financial decisions and to weigh different commitments and the time spent on each.

 

 

 

  • To measure and reassess your progress

Using finance and accounting tools to monitor progress and, where necessary, make adjustments is crucial for a business. Measuring your actual progress versus predicted progress helps keep you focused. Measuring progress in a way that links profits and processes helps your business become more productive because it allows you to highlight problem areas and exploit opportunities. 

 

 

 

Using accounting as a tool for growth

 

 

 

Apart from being necessary for a company's immediate financial health, accounting is an important strategic tool for entrepreneurs. Sound accounting allows small business owners to make projections and predictions based on solid, accurate financial data. This leads to smart and informed budgeting in the present and strict adherence to that budget, avoiding unnecessary debt accrual that could see your business fail.

 

 

 

Competency in accounting will allow you to properly evaluate your business’s performance and make judgements regarding which aspects work well and are worth investment and which aspects need improvement or are simply unprofitable.

 

 

 

Here are some ways in which accounting can help you grow your business:

 

 

 

  • Set goals based on financial history and reporting

Solid financial data can help you set both short and longterm goals for your business, based on fact. Using previous financial information will help you make informed growth decisions. Once you have an idea of your period expenses and revenue over time, you can use this information to create a break-even analysis, giving you a better sense of what you need for profitable growth. 

 

 

 

  • Prevent avoidable surprises

If you understand your cash flow projections, you can avoid surprises when planning your business’s future. Reliable accounting and financial data will help you seize new opportunities quickly and effectively because you have a comprehensive overview of where your business stands.  

 

 

 

  • Know the value of your business 

As a business owner, you are no doubt passionate about what you do. Even if you think you are many years away from retirement or selling out, knowing the value of your business today is important so you can plan for the future you want to have. You can then begin some degree of business succession planning to build up the people who may eventually take over key parts of the business.

 

 

 

Accounting skills all entrepreneurs need 

 

 

 

As a current or aspiring entrepreneur, it’s easy to get caught up in the more exciting aspects of launching a business and often accounting and finances are placed on the back burner. While each aspect of your business is important, it is crucial to focus on the more mundane aspects of running a business - such as accounting. Being able to work with money to ensure you can purchase supplies, pay creditors, and attract investors is just as important as developing and executing your business plan, especially in the early stages of your business.

 

 

 

For many businesses, accounting impacts nearly every aspect of business management. Whether you’re applying for funding or investment, managing payroll and human resources, paying expenses, invoicing clients or planning for the future, accounting will form the basis of everything you do. 

 

 

 

Even if you use the services of an accounting firm, you must understand enough about the subject to have meaningful and insightful interactions with potential partners and investors, your employees, and others.

 

 

 

According to Harvard Business School, the following accounting skills are critical for entrepreneurs: 

 

 

 

  • Managing cash flow

For many businesses, especially new ones, where credit is limited and obtaining finance is difficult, cash is one of the most important assets. Without it, you can’t pay suppliers and will find it difficult to build inventory, reach customers, and grow the business. Understanding cash flow will allow you to plan for the future and to make sure that you have enough cash to keep your business running. If you plan to grow your business, paying attention to cash flow will help you plan for the future, prevent shortages and use your cash effectively. 

 

 

 

  • Maintaining a balance sheet

The balance sheet provides a clear image of your business’s  financial well-being at a specific point in time. It allows you to see what resources are available, how those resources were financed, and provides a picture of your assets and liabilities. Entrepreneurs can use their balance sheet to determine what the company owns as opposed to what it owes. While investors are interested in growth potential, it is aso important to take into account where the business currently stands. 

 

 

 

  • Plan for profitability 

You have to know how much money is left after your expenses have been paid. This is crucial to attract investors, plan for the future and succeed over time. 

 

 

 

  • Communication skills

As an entrepreneur and business owner, you should be comfortable and able to discuss the difficult figures relating to your business— with employees, suppliers, and investors. Developing your organisational capacity and putting measures in place relating to the company’s finances can help save your business from misunderstandings and miscommunications. This is very important when working with multiple invoices and accounts.

 

 

 

  • Forecasting 

Every entrepreneur aspires to grow their business. In order to plan properly for the future, entrepreneurs must be able to make predictions regarding revenue, operating costs, resource needs and profit levels. This is critical to attract investment, secure funding and scale the business.

 

 

 

Whether you're considering starting your own business or have already taken the leap, cultivating your accounting skills will enable you to reach your business goals. 

 

 

 

Ensure your business is compliant 

 

 

 

South Africa’s small business failure rate of almost 80% within the first three years means the average entrepreneur’s chance of starting a business, growing it and creating much-needed jobs is painfully slim. This is why all business owners and entrepreneurs need to keep their finger on the pulse of a constantly changing regulatory environment.  When it comes to a business, compliance refers to the company complying to all laws and regulations in regard to how they manage the business, their staff, and their treatment towards their customers. Compliance ensures companies act responsibly.

 

The only way to reduce liability and business risk is to ensure your business is fully compliant from the first day you start operating. 

 

 

 

Here are some tips to ensure your business is compliant, accountable and transparent:

 

 

  • Understand your business. Make sure you understand the legislation and regulations relevant to your industry. Also make sure you understand why meeting legal obligations is important. 
  • Be proactive and keep up to date. Have regular meetings and plan well regarding compliance matters to ensure you don’t miss important changes, updates and dates for submission. Also ensure you have proper monitoring and evaluation processes in place for corrective measures. 
  • Have the right mentality and be responsible. To protect your business and save it from failure due to non-compliance, make sure you have a ‘tick-the-box’ mentality. Get your compliance right from day one to ensure your business is safe. It is your responsibility to follow protocol and ensure you meet the compliance requirements. 
  • Where possible, use online compliance tools to track and monitor regulatory changes. This is cheaper than employing a compliance officer in-house. As your business grows, you can consider employing a compliance officer on a full-time basis. 
  • Train your team. Make sure you educate your team to follow the rules and ensure there are open lines of communication. Have corrective action plans in place, in case. 

 

The benefits of compliance in business: 

 

  • Reduced legal problems. Being compliant decreases your risk of fines, penalties, lawsuits and criminal charges and even the shutdown of your business. 
  • Improved operations and processes. By ensuring you follow the rules, you can create a better working environment for your employees and ensure your business operations are safeguarded.
  • Better public relations and marketing. If your business is fully compliant, you can use this as a marketing tool to attract clients. Potential clients will have confidence in your offering if they know you follow the rules. If your company is thrust into the public eye for failure to comply, there will be reputational repercussions. 
  • Higher employee retention. Compliance in business ensures your employees are protected. If employees feel they work in a professional, fair and safe environment, they are likely to stay with you. 
  • You are able to do business with government and parastatals. If your business is compliant, you will be able to take part in tendering processes and feature on the supplier database. 

 

 

Getting your business finances in order

 

 

 

This step-by-step guide walks you through a basic plan for getting your accounting in order. Consider it your financial to-do list. Not all the aspects mentioned below are compulsory, but it would be useful to take into account. If you are not entirely comfortable with handling your business’s compliance, it is critical to make use of an accountant or an accounting firm from the beginning.

 

 

 

  • Register your business

While it is not compulsory, the first step to ensure your business operates legitimately is to register it with the proper authorities. In South Africa, company registration is overseen by the Companies and Intellectual Property Commission (CIPC).  

 

 

 

You need the following in place before you can start getting your accounting and finances in order: 

 

  • Business plan (not compulsory but useful)
  • Funding proposal (not compulsory but useful)
  • Company registration documents from the CIPC (the online registration of companies is possible)
  • Income tax registration at the South African Revenue Service (SARS) 
  • Share register and share certificates for all shareholders
  • BBBEE affidavit/certificate (not compulsory)
  • Tax clearance certificate
  • EMP (PAYE/UIF) registration at SARS (if you have employees)
  • A business bank account 

 

 

  • Open a separate business bank account

You need to keep your business income separate from your personal finances and the easiest way to do this is to open a separate bank account for your business. 

 

 

 

  • Track your expenses

Good record keeping will help you get a handle on the overall financial health of your company. This includes tracking expenses related to business meetings, travel for work and costs relating to your car if you use it for work purposes, living expenses that overlap with your office (such as rent, internet and phone bills). The easiest way to track your expenses is to use cloud accounting software. This is much faster and more efficient than physically filing receipts. 

 

 

 

  • Know your tax obligations 

The tax obligations of your business will depend on the legal structure of your company. Make sure you understand what is expected of you and your business. 

 

 

 

  • Review your methods and adjust 

As your business grows and your services evolve, the accounting methods you use could change. Be aware of the amount of time you spend on accounting and reflect on how much that time costs your business. If handling your accounting needs becomes too great, you need the help of an accountant.

 

 

Cloud accounting software 

 

 

 

As the world navigates the fourth industrial revolution, entrepreneurs and small businesses in South Africa cannot afford to be left behind. In a case of “adapt or die”, AI and cloud accounting are offering businesses and accounting firms the competitive edge and the opportunity to be at the forefront of the digital revolution. 

 

From project management to social media, everything happens in the cloud. If you're a small business, you're probably already using the cloud in many ways without even realising it. In the past few years, cloud accounting has exploded in popularity. There has never been a more important time for businesses to review their accounting services and embrace cloud and AI technologies. 

 

 

 

What is cloud accounting software? 

 

 

 

The main difference between desktop and cloud accounting software is that cloud software runs on the internet and can be accessed off-site, on any device with an internet connection. Desktop accounting software, on the other hand, can also be used on computers where it has been installed. Cloud accounting can update financial information in real time, giving business owners immediate access to their reports. Back-ups and updates take place automatically, making maintenance with cloud accounting software minimal. 

 

AI and cloud accounting have opened doors like never before and have revolutionised accounting companies and the small business industry, offering countless benefits to improve profitability, efficiency and add value to business owners. The benefits of cloud accounting, AI and machine learning are endless. They have become buzz words in the tech industry, and, while it can be daunting at first, the benefits can be explained simply. 

 

 

 

Benefits of AI and cloud accounting for entrepreneurs

 

 

 

  • AI and cloud accounting is secure. When you are cloud-based, your accounts and records are all saved and backed up securely.
  • It is accessible. Because of new technologies, accounting clients can access information in real-time, anywhere and on almost any device.
  • It is affordable. Online accounting is carried out entirely from the cloud. There is no costly IT infrastructure for you to maintain.
  • It is effective. At any given time, business owners have a clear view of their financial situation and can make informed decisions using accurate and relevant information. This is critically important in an ever-changing business environment where decisions have to be made quickly and correctly. 
  • The integration possibilities are endless. Payment systems, sales systems and stock management systems can easily integrate with platforms such as Xero and Osidon, offering added value to clients that they may not have had access to otherwise. When these systems work together, clients have access to a one-stop shop to run their business more cost-effectively, productively and efficiently. Osidon has integrated with Xero and also added numerous other functionalities, such as banking services, access to website platforms and legal advice to their accounting, tax and payroll services.  

 

 

If tech solutions take over the bulk of the work, completing time and energy consuming tasks automatically, accounting firms and business owners are free to focus on their core business tasks. They will have more time to focus on their clients, developing their business and growing the economy, leading to job creation and improved employment figures.

 

 

 

Choosing the right accounting firm for your business

 

 

 

You should hire a registered accountant when you can no longer manage the day-to-day financial transactions for your business.

 

 

 

Selecting the right accounting firm/small business accountant to partner with your on your business journey is critically important. The right accountant will become a trusted ally you can depend on, who offers advice and guidance as your small business grows. 

 

 

 

It's in your company’s best interests to have an experienced accountant handling your finances. The right person will save you time and money continuously. Here are some tips for choosing the right accounting firm.

 

 

 

  • Ask the right questions

It’s important to know what you need and to take the time to select your accountant carefully. Firstly, you need to understand the kind of work or responsibilities you want the accountant to handle for your business. You'll need to think about issues such as the accountant's availability, the workload, payment and the type of online accounting software you want to use. 

 

 

 

  • Certification of accounting firms in South Africa 

Accounting firms in South Africa are regulated by professional bodies which look after accounting qualifications and maintain high professional standards. If you want your company to grow, you should hire a registered accountant. While tasks such as bookkeeping and tax services might not require a certified accountant, you want someone with experience and expertise to add value to your business.  

 

 

  • Accounting firms’ expertise 

It is important to make sure the accountant you select has worked with businesses similar to yours. If they have been working for clients from a specific industry for a long time, accountants get to know the related challenges very well. This will ensure they understand your business’s needs. In general, you don’t want a one-man-band, you need a larger firm with various areas of expertise so problems can be solved in creative ways by more than one person.

 

 

  • Choose someone who is proactive about saving money

While most accounting firms in South Africa take care of your finances, accounts and taxes, you need an accountant who is proactive about saving you money. You need an accountant with the relevant legal knowledge to ensure you are saving money in legal ways because, if you break the law, you will be liable for penalties. Ask prospective accounting firms how they suggest to save your business money. 

 

 

 

  • Tech-savvy accounting companies 

You may find some accountants who use outdated accounting software. They do not want to switch to the latest online accounting solutions. With the fourth industrial revolution in mind, you will want an accountant who keeps up with the latest developments in the industry. 

 

  • Accounting software: cloud accounting is the future

Ideally, you want to use the same accounting software as your accountant. This will save time and prevent issues with sharing data. Do proper research to make sure you’re using market-leading software that’s safe and easy to use. If you use cloud accounting software, make sure your sensitive financial data is suitably encrypted. Also make sure the online accounting software you use can integrate with other systems you use. 

 

 

 

  • Transparent accounting services 

Make sure you have clarity about what your accountant is doing. You should regularly ask for reports and feedback. Ideally, you are looking for an accountant working on a live system so you can remain up to date at all times.

 

 

 

  • Contract and fees 

Not every accountant or accounting firm charges the same fee for its services. Ensure you know exactly what you are paying for and find out which services are not included in the standard fee. It is best to pay a fixed fee and not bind yourself to an extended contract.

 

 

  • Location isn’t everything, thanks to cloud accounting  

Because of online and cloud accounting services, it is no longer necessary to be located close to your accountant. With cloud accounting, you and your accountant can view the same real-time data at the same time, anywhere in the world. Ask yourself if it is necessary to find someone in the same city as your business or can you collaborate via email, phone calls, video-conferences, and secure online accounting software. 

 

 

 

  • Recommendations 

Ask other business owners about the accounting services they use. A recommendation from your friends, family or peers can go a long way in helping you choose the right accountant. Ask other business owners about their experience of working with their accountant and get an idea of the budget required. 

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