The operational trap for Small businesses

on Tuesday, 19 February 2013. Posted in Accounting, System Implementation

The operational trap for Small businesses

I believe the majority of small businesses struggle because they are obsessively focussed on operations and seldom care about words such as administration, systems, structure, controls, data analysis, customer relationship management, budgeting, financial reporting, professionalism, technological advancement, strategic planning …. They just don't have time for all this. They believe this is for bigger businesses. Let's call this Small Business Sins (SBS).

I believe this is what keeping them from becoming a bigger business.

Let's look at an example regarding one of the neglected areas mentioned above, take accounting systems:

A solid business structure and system is crucial for growth and for efficient operations. Without a solid accounting system it is impossible to obtain an accurate reflection of your financial position. Without a reflection of your position you will not be able to make informed decisions. You will not even be able to separate a good month from a bad one. Small business owners tend to over rely on feel and would be quick to defend themselves in saying that I know exactly what is going on in my business. Have you processed your latest trip to Mr Roux, the 20km you travelled to do a job of R 200? Let's say you drive a petrol vehicle with a 1400cc engine which you bought in 2011 at a cost of R 140 000 in your personal name. Your actual cost per kilometre (including fixed cost, maintenance and running costs) will be close to R 4 per kilometre. Thus your cost for the trip was R80. So the profit of R200 that you thought you made suddenly dropped by 40%.

If you have processed this trip on your accounting system you would also have been able to have clear records of your trips. Since the car was bought in your personal name you would have been able to deduct the full R 80 from taxable income. Let's say your effective tax rate is 20% this would have entailed another saving of R 16 on your tax. Not allot? If you were to make two trips a day to a customer on each business day of the week you would save R 8 320 for the year.

So the R2 000 you saved by not implementing a proper accounting system was not that big saving?

We will discuss another example from the list of SBSs in a future blog. Feel free to comment.

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