Dormant company SARS Tax Penalties: Why Shutting Down Your Dormant Company Can Save You From Costly Penalties
Dormant company SARS Tax Penalties: Why Shutting Down Your Dormant Company Can Save You From Costly Penalties In our extensive experience as accountants and business advisors, we frequently encounter individuals who have registered businesses for various reasons. In this article, we will delve into these common motivations and explain why shutting down your dormant company can save you from costly penalties. Common Motivations for Business Registration: Formalizing a Side Gig: Many people register businesses to legitimize a side hustle before realizing it may not be sustainable or they lack the time to run the venture effectively. Meeting Regulatory Requirements: Some individuals are requested by friends to serve as directors for a company primarily to fulfil regulatory obligations, often related to BBBEE (Broad-Based Black Economic Empowerment). Shifting to Sole Proprietorship: There are instances where individuals initially registered a company but later decided to continue trading as sole proprietors. Overseas Relocation: People who registered a company but subsequently relocated abroad for employment often leave their company unattended. Regardless of the initial reason for registration, many of these businesses eventually become an administrative burden for their founders, partners, or directors. These administrative challenges encompass: Compliance with CIPC: Ensuring adherence to regulations set by the Companies and Intellectual Property Commission and the Companies Act. Filing CIPC Annual Returns: Meeting the requirement to submit annual returns to maintain company compliance status. Filing SARS Tax Returns: Addressing the critical issue of filing tax returns with the South African Revenue Service (SARS). The Risks of a Dormant Company The company you registered but might have forgotten about can pose a substantial tax risk. Here’s why: Tax Obligation: Registered companies have a legal obligation to file annual tax returns with SARS to provide updates on their financial and trading status. Accumulated Unsubmitted Returns: If you’ve lost track of your registered company, you may have a backlog of unsubmitted tax returns. For instance, if your company was registered five years ago, you could potentially have five years’ worth of outstanding tax returns. This applies to all applicable tax types, including VAT and PAYE. Ignored Notifications: You might have received notifications and reminders from SARS but overlooked or failed to understand their significance. Penalties: SARS imposes administrative penalties for non-submission of tax returns, even if the business is not actively trading. These penalties can vary but often start at R250 per month, with a maximum penalty of R16,000 per month. Consequently, for five years of non-submission, you could face a minimum penalty of R15,000. It is important to note that the trigger for these penalties is not trading status, but non-submission of tax returns. Steps to Mitigate Penalties So, what should you do if you find yourself in this situation: Submit Outstanding Tax Returns: Initiate the process by submitting all outstanding tax returns. File Returns Regardless of Income: File tax returns for all relevant years, irrespective of whether your business generated income or expenses. As mentioned earlier, penalties are triggered by non-submission, not income levels. Understand Responsibilities: Avoid registering as a director or tax representative for friends or family without fully comprehending your duties toward the company and tax authorities. Check Company Compliance: Utilize the Companies and Intellectual Property Commission (CIPC) to obtain a ‘spider report’ for each company you are a director of and verify their tax compliance. Consider Resignation: If you’ve already registered as a director or tax representative, explore the possibility of resigning from those positions. Engage with SARS: Communicate with SARS to discuss penalty remittance, repayment plans, or reduced penalties. Deregister Inactive Companies: If your intent is not to maintain the company’s active status, consider deregistering it with CIPC and SARS. Conclusion: Remember, SARS appreciates law-abiding citizens. It’s best to be proactive and honest in addressing any oversight or compliance issues. Approach SARS with transparency and a willingness to rectify the situation by submitting overdue tax returns and seeking resolution for penalties. Feel free to reach out if you require assistance or have further questions. Leave a message Subscribe now:
Tax season deductions: Basic deductions you can use to save on tax (how to get a tax refund)
Tax season deductions – what you should know The tax season is offically coming to an end for non-provisional taxpayers in the next few days. But, even if you are planning for the next tax season, this article is for you as it will consider a few options/deductions that you can use to reduce your tax liability. Let’s consider these: Medical aid credits: Taxpayers can claim deductions (or tax credits) for medical aid schemes they contribute to. This can be applied where you contribute as a principal member or where you are not a principal member but pay for and on behalf of someone like a close family member. The credits depend on the number of beneficiaries of the medical aid. The more the beneficiaries the more the credits one can get. For the taxpayer or the first beneficiary, the tax credit is R332 for the 2022 tax year (R319 – 2021), R664 for the taxpayer and one dependant (2022 or 638 for the 2021 tax year and R224 for any additional beneficiary (215 for the 2021 tax year.) Retirement annuity: If you make contributions towards a pension, provident fund or retirement annuity, you can also claim deductions on taxable income. Taxpayers are allowed to deduct up to, from their taxable income, 27.5% of their remuneration of taxable income, whichever is greater, up to a maximum of R350 000 per tax year if they contributed to a retirement annuity fund, pension or provident fund. Therefore, it is important that the taxpayer examines and calculate their annual contribution in order to fully take advantage of this tax benefit. However, there is no tax benefit once you withdraw from this fund (we will talk about withdrawals in another publication.) Donations: The taxpayer can also claim donations against his/her taxable income. There is a catch though. The deduction is limited to 10% of the taxpayer’s taxable income before claiming donations as a deduction (so, if the taxable income is R300 000, the claim cannot be more than R30 000.) The charitable organisation the taxpayer gives a donation to must also furnish the taxpayer with a Section 18A certificate, not just a receipt. Home office expenses. We have previously written about home expenses here. So, if you need a more detailed guide, please refer to that article. However, let’s cover a few things here too. Certain expenses that a taxpayer incur as a result of working from home can be claimed as a deduction against taxable income provided certain conditions are met: The employer must allow the taxpayer to work from home. So, you can’t just work from home because you want to. Your employer must give you express permission to work from home. The taxpayer must spend more than half (50%) of their total working hours working from their home office. The part of the home in respect of which a claim is submitted must be occupied for purposes of a “trade”, as defined in section 1. So, in essence, there should be a specific part of the home that is used exclusively for this purpose. As an example, a specific set aside office must be kept aside for the trade. A taxpayer meeting with a client in the bar area of their home may not qualify for these deductions. Building from the point above, the part that is so occupied must be specifically equipped for purposes of the trade. So, it is important that the space/office must be specially fitted with the relevant instruments, tools and equipment required for the taxpayer to perform their work. The part must be regularly and exclusively used for purposes of the trade. As an example, taxpayers who earn a commission but who spend the majority of their time on the road visiting clients and performing their work at the client’s premises do not qualify for home office expense deduction. Refer to our previous article on home office expenses for further details and examples of expenses that a taxpayer can get as a deduction for working from home. Tax-free investments: These accounts are offered by various financial institutions. The tax benefit is that any income (interest, dividends, REIT payments and capital gains) accrued or received from these funds are exempt from tax. For example, interest income earned is fully exempt from tax as opposed to interest earned elsewhere, which can be exempt only up to certain amounts as per the Act. Though the income is exempt, this must still be included on the taxpayer’s tax return. Contributions to these funds should not exceed R33 000 annually and a lifetime agreement of R500 000. Any contribution above these amounts triggers a tax on the income earned. Foreign income: Ever heard f the 183 days rule? Individuals working overseas for a 183-day term could claim back tax deductions on income earned for the period there were outside the Republic. After 1 March 2020, the exemption is the first R1.25 million of foreign employment income earned by a resident will qualify for an exemption for tax years commencing on or after 1 March 2020. Travel claim: If you use your vehicle for work purposes and you are able to prove to SARS that you used your vehicle for work purposes, then you can claim a deduction on it. The catch, keep a travel logbook. Do not “manufacture one!” Wear and tear: The world is changing and often employees will use their own tools and equipment to carry out their work. If you are using goods/tools that you bought with your money for work purposes you are entitled to claim depreciation on these tools/assets. These can be computers or laptops. The catch, the cost of the assets must be written off over a time stipulated by SARS and you must be able to prove that the asset/tool was used for work purposes. For example, computers are written off over a period of 3 years. Assets that cost less than R7000 can be written off in full in the
Effective Steps to Successfully Close a Business in South Africa (Guide)
Effective Steps to Successfully Close a Business in South Africa: CIPC and SARS Deregistration Guide (2026) Quick Answer: How Do You Close a Business in South Africa? To close a registered company in South Africa, you must first determine whether it qualifies for voluntary deregistration or requires a formal liquidation process. For a company that has stopped trading and has settled its assets and liabilities, the closure process generally involves: Reviewing the company’s financial position. Collecting outstanding customer payments. Settling creditors and other liabilities. Addressing employee and contractual obligations. Disposing of business assets and stock appropriately. Finalising accounting records and outstanding tax returns. Applying for CIPC deregistration where eligible. Cancelling the relevant SARS tax registrations and other employer registrations. Retaining the required business records. Important: Simply stopping trading does not automatically close a company or end its tax obligations. The correct process depends on whether the company is solvent, has outstanding debts or still owns assets. 1. What Is the Difference Between Deregistration and Liquidation? Before closing a business, it is essential to understand the distinction. Deregistration Liquidation Generally appropriate for a company that has ceased trading and meets CIPC eligibility requirements Formal winding-up process for a company with assets or liabilities requiring administration Removes the company from the CIPC register Involves the legal administration and winding-up of the company’s affairs Usually simpler where all affairs have been finalised Usually involves additional legal procedures and a liquidator Does not provide a lawful shortcut for avoiding creditors Provides a formal process for dealing with creditors and distributing assets Subject to CIPC requirements and objection procedures May apply to solvent or insolvent companies under different legal procedures CIPC also provides for certain deregistration situations involving insufficient assets to justify liquidation. These cases require careful consideration, particularly where liabilities remain. A company can therefore be solvent and still require a formal winding-up process. 2. Why Would Someone Decide to Close a Business? Business owners may decide to close their companies for several reasons. These include: Continued financial losses. Insufficient cash flow or working capital. Retirement or a change in career. Completion of a specific project. Changes in market conditions. Loss of major customers. Technological changes affecting the business. A decision to focus on other investments or businesses. Shareholder or ownership changes. A business that was registered but never commenced trading. Not every struggling business needs to close. Depending on the circumstances, restructuring, selling the business or negotiating with creditors may be possible alternatives. 3. Start With a Business Closure Plan A structured closure plan helps business owners identify outstanding responsibilities before beginning the deregistration process. Start by preparing a current financial position. Review: Bank balances. Trade receivables. Trade payables. Outstanding loans. Inventory. Vehicles and equipment. Tax liabilities. Employee obligations. Existing contracts. Shareholder loans. Other assets and liabilities. This information helps determine whether the business can settle its debts and whether deregistration or liquidation is appropriate. Example: Assessing a Company’s Financial Position Suppose a company has the following position: Description Amount Cash available R40,000 Customer balances recoverable R80,000 Estimated net proceeds from assets R100,000 Total estimated available resources R220,000 Trade creditors R90,000 SARS liabilities R30,000 Other liabilities R40,000 Total liabilities R160,000 Estimated surplus before closure expenses, additional taxes and other adjustments: R60,000 This suggests that the company may have sufficient resources to settle its recorded liabilities. However, it does not establish that the company is legally solvent or that deregistration can begin immediately. The company must still consider contingent liabilities, asset realisability, tax consequences and the appropriate closure procedure. 4. Notify Employees and Comply With Labour Legislation If your business employs staff, closure may involve retrenchments or other lawful termination arrangements. Employers must consider the Labour Relations Act, including the applicable consultation requirements for dismissals based on operational requirements. Depending on the circumstances, obligations may include: Consultation with affected employees. Consideration of alternatives to dismissal. Appropriate notice. Statutory severance pay where applicable. Outstanding remuneration. Accrued leave payments. UIF documentation. Relevant employment certificates and records. Example: Severance Pay Under the general statutory minimum for qualifying operational-requirements dismissals, severance pay is at least one week’s remuneration for each completed year of continuous service, subject to applicable legal provisions. Suppose an employee earns R5,000 per week and has completed four years of continuous service. Illustrative minimum severance: R5,000 × 4 = R20,000 Other termination payments may also be payable. Important: The calculation of remuneration, eligibility for severance and any applicable exceptions must be assessed under the relevant employment legislation. Business closure does not automatically remove an employer’s labour-law responsibilities. 5. Inform Customers and Review Existing Contracts Customers should receive appropriate notice where the business can no longer provide products or services. Review outstanding contractual obligations, including: Customer agreements. Supplier agreements. Property leases. Equipment rentals. Software subscriptions. Insurance policies. Service agreements. Finance contracts. Some agreements may contain notice periods, cancellation charges or other termination provisions. Do not assume that closing the company automatically cancels its contractual obligations. 6. Collect Outstanding Debtors Before closing the business, review all outstanding customer accounts. Prepare a debtors age analysis showing: Amounts outstanding. Due dates. Overdue balances. Disputed invoices. Potentially irrecoverable debts. Where appropriate, follow up with customers and consider lawful collection arrangements. Why Is This Important? Outstanding debtors are company assets. If a company still has recoverable receivables, it may not yet satisfy the requirements for straightforward voluntary deregistration. Uncollected balances should therefore be properly addressed before the company is closed. 7. Settle Creditors and Outstanding Liabilities A business must properly address its liabilities before pursuing a closure process. These may include: Suppliers. Banks and finance providers. Employees. Landlords. SARS. Shareholder loans. Other creditors. Where the company cannot pay its debts, directors should seek professional advice on the appropriate legal process. Do not distribute remaining cash to shareholders while ignoring outstanding creditors. What If the Business Owes SARS? Depending on the circumstances, SARS may permit a qualifying taxpayer to apply for a payment arrangement or compromise of tax debt. These are formal processes subject to statutory requirements and SARS approval. They
Timely Financial Reporting/Financial Statements preparation
Financial statements are intended to meet the needs of decision-makers as well as providing useful information to shareholders. As a result, the timely preparation of these reports is essential. Financial statements must be available in time to inform decision-making. Therefore, it is important that financial reports/financial statements should be published as soon as possible after the end of the reporting period. However, we should note here that timely financial reporting should not be reduced to a well-managed busy financial statement drafting season. Rather, it requires careful, yearlong planning and monitoring. Of course, the need for timeliness has to be balanced against the need for reliability, which in addition to timeliness is also an essential characteristic of financial statements. Requirement of the Companies Act: In terms of the Companies Act, Section 30, Companies are required to produce annual financial statements within 6 months of their financial year-end or within any shorter period as may be appropriate to provide the required notice of an annual general meeting in terms of section 61(7). For example, if one’s year-end of Feb 2018, they should have a set of financial statements by end of August 2018. Recommendations: I would like to make the following recommendations about ways to improve the timeliness and reliability of financial reports. These recommendations are based on my personal experiences and cannot be viewed as an exhaustive list. Do not leave it until the last time: It is never a good idea to start the preparation of your financial statements late on in the year. As mentioned in my introduction, the process requires careful yearlong planning and monitoring. Start with clients whose books are updated and are in order on a monthly basis. For me, these are the client I have monthly management meeting with and at each management meeting, we ensure that the accounts for that month are in order. Once we close off the accounts, we do not come back to these to make any changes. You will find that by the year-end, there is little left to do to produce the financial statements because all books are in order. For me, I find that this process ensures the ongoing completeness and accuracy of financial data. Team collaborations: Reid Hoffman once said, “No matter how brilliant your mind or strategy, if you’re playing a solo game, you’ll always lose out to a team.” I cannot stress enough the importance of working as a team and ensuring that the communications among the team are good and maintained. In my firm, as an example, we have three teams that work closely together to produce financial statements; the tax team, the financial statements drafting team and the financial management team. The financial management team is responsible for day-to-day accounting and the production of the Trial balance. The tax team helps with all complex tax matters. The drafting team takes the Trial balances and produces the financial statements. What makes the teamwork together well is communication, each member communicating whatever changes or processes that take place at any stage of the process. The biggest advantage of all this is that the reliability of the financial statements is greatly improved. The application of tax and financial reporting laws is also improved. Systems and processes: I also find that it helps to have proper systems and processes in place for the production of financial statements. Companies should have a financial system that they use to draft financial statements. These should be able to produce financial statements acceptable for submission with SARS and the CIPC. Also, there should be a well-defined process for the production of financial statements. It could be a well-defined checklist, which has all elements that must be checked before a trial balance is imported into the financial statements software. The presence of such a process will also go a long way in producing a reliable set of financial statements. Closing and financial statement preparation processing: The annual closing process. To avoid delays, aim to have your annual close within a month from the end of the financial period. Communicate these deadlines to all people involved in the process so that everyone is aware of the deadlines and the deliverables that each should meet. Unforeseen circumstances. The financial report preparation process may identify items that could affect the amounts reported in the financial statements, such as legal disputes, contractual obligations e.t.c. In most cases, a reasonable amount of time may be needed to resolve such items. To avoid delays, it may be better to proceed with the issuance of the financial statements based upon reasonable estimates, rather than to delay their issuance. Planning: There is that old saying that says if you fail to plan, you plan to fail. It is important to carefully when for when the production of financial statements should start, and by whom the financial statements should be prepared. As mentioned earlier, do not leave the drafting to the busy drafting periods. After the year ends, aim to have at least one set of financial statements done per week. Start with those where not too much cleaning is required going to those where late adjustments and more cleaning is done. Also, you may want to aim to submit these financial statements by the time the tax season opens in July. So, plan in a way that will make this possible. Leave a message Subscribe now:
Are you ready to exit from your business?
Are you ready to exit your business? Some people go into business with the aim of building a good business then sell it. Others spend years building their businesses so that they may leave something for their children. Whatever the intention, it is clear that at some point one will exit their business. Even though the idea of you exiting your business sounds inconceivable, you must remember that you will not run your business forever. As an example, the people that started Coca Cola are not the same people running it today. Therefore, you and your business must be exit and investor-ready at every stage of your business. You must have an exit plan. The exit will happen in a different form, whether you are prepared for it or not. Your exit from your business may happen in any of the following ways: Retirement The passing of your business to your children Selling Health issues limiting the ability to run the business Death Lack of interest in the business and a desire to start a new venture Exit an unprofitable business Every business must have an exit plan: Unplanned exits may be disastrous. Imagine trying to sell a business whose tax affairs or books are not in order. Also, investors are looking for a well-run company. They want to know that their money will not go down the drain. A good plan will ensure that you exit at the right time. Remember, just because you are ready to exit does not mean your business is ready. Life has its own dictates on when or how you will exit our businesses. When life circumstances dictate an unprepared exit, it rarely goes smoothly. Do you know how much your business is worth? Any exit plan should start with a professional valuation. A professional valuation is critical to ascertain the accurate value of your business. If you are to approach a buyer and you do not know how much your business is worth, where are you going to start the negotiations for a price? Proper due diligence will also be needed. This will help you to review your business from the perspective of a potential buyer. It will help you identify any gaps in the key drivers of your business and identifying ways of closing these gaps in order to have a proper exit and investor-ready business. Good due diligence will also enable business owners to determine the key value drivers of the business and identify the areas that will impact its sale value. Once you have a proper plan, a value for your business and well-executed due diligence for your business, it will be easier to identify and approach potential buyers. Some of the actions that are important in developing an exit strategy: Do not allow the business to heavily rely on you and your skill set. When you get sick or die, the business takes sick leave or dies with you. Therefore, develop key employees who can run the business on a day-to-day basis without your involvement. Develop an operating manual of how you do what you do. Define each key process and quality control checks. This is important because business goes on even when you or your key employees are not around. In addition to the operating manual, have a library or knowledge base. This will ensure that important information/knowledge is shared among everyone in your business. Also, you will most likely find yourself in a unique situation from time to time. Adding your experiences of the case and how you dealt with it will ensure that you do not waste time dealing with a similar issue in the future. Have a dashboard that shows you the key performance indicators and what the trends of those indicators are. Have a compensation system in place that rewards managers who help improve key performance indicators of your company and who come up with innovative ideas to improve your business and customer experience. Have a data room for your business. A data room is a place where you store all important documents and information about your business. Your data room may include but not limited to: Latest financial signed financial statements Share certificates and share register Memorandum of incorporation (MOI) Company registration documents Your latest up to date Tax clearance (what is now known as Tax Compliance certificate) Operating Manual and knowledge base Shareholder Agreements Board members and advisors Licences and permits and other Intellectual properties Strategy and KPI targets Pressroom Internal controls Risk profiles and risk management Organisational structure CVs of key management Summaries of key employment agreements and benefit plans Copy of IDs for senior management Material contracts Be aware of the tax consequences If you will be selling beware of the tax consequences. Whether you sell the operating assets in the business or the business as a whole, the transaction will attract Capital Gains Tax (CGT). Therefore, a well-thought tax plan is an important part of the overall exit plan. If you do not have a dedicated tax team within your business, get the services of a professional Tax Advisor/Practitioner. Succession after death or retirement: Strategic planning for a business needs to include a proper succession plan. Succession planning may not be high on your agenda but retirement and death are certain. In a small/family business succession planning is even more important to effectively conclude the transfer of ownership or management from one party to another: The first step is to draw up a shareholders agreement. The agreement should specify the rights and privileges of a shareholder if they wish to sell/exit. It should be agreed if the existing shareholders have the first preference to buy. The agreement should specify the terms and conditions of the sale and purchase by existing shareholders if existing shareholders are to takeover. The second step is to take a policy to cover for the key shareholders. This should step in when the key shareholders die or get disabled/or are permanently incapacitated. To avoid
Is SARS always right? What if I do not agree with their assessments?
Is SARS always right? What if I do not agree with their assessments? Many of us see SARS as that horrible master who just wants to take our money at every opportunity possible, and it’s money they didn’t even work for. Sometimes you look at an assessment and you even wonder what they are trying to do. Maybe they even issue an assessment and go on to recover monies owed by you by issuing an instruction to your bank to deduct whatever they feel is due to them. If this happens, what are your options? Once the Revenue Authority issues an assessment on your tax return and they have issued a notification for the tax payable or refundable under your tax return, you can: Choose to accept the assessment Ask for reasons as to how SARS arrived at the issued assessment. This must be done within 30 days from the date of the assessment You can choose to lodge an objection within 30 business days from the date the assessment is issued or within 30 business days after receiving the reasons on how SARS arrived at its assessment SARS has a detailed guide on how you may file a notice of objection. However, I would advise that you consult a professional tax practitioner to assist you: Ascertain if SARS’ assessment is correct Determine if the relevant tax laws were applied correctly Correctly lodge a Notice of objection on your behalf Tips to get your objection right: Ensure that you have all the supporting documents for the amounts you are objection to justify your reasons for objecting to the assessment. (For example, if you believe SARS missed your Medical Aid contributions, then you must have the supporting medical aid certificate when you lodge your objections) Ensure that you indicate the tax type(s) and tax years that you which to proceed and object Ensure that you select the items to dispute against by selecting the relevant tick boxes Ensure you have selected the correct source codes/ transaction code of the disputed item is displayed. It is important that you get the correct source codes as SARS may reject the Objection based on the fact that you put an incorrect code even though the objection is on valid grounds. Watch that you distinguish between dispute amount and requested amount. Again, SARS may turn back your objection if the distinction between these two is not shown. The disputed amount is the amount that has been charged for interest or penalties for late payment are displayed. The requested amount indicate what you believe the amount should be. This is important because if this amount and the amount above are the same, SARS will reject the NOO on that technicality. An objection that does not comply with the rules of objections and the Tax Administration Act may be disallowed. In terms of the rules, you may submit a revised objection within 20 days of receipt of the notice of invalidity by SARS If the objection is disallowed, you may elect to accept the outcome or appeal against the decision. If you elect to appeal the outcome, then you may elect to take the Alternative Dispute Resolution (ADR) route or the litigation route (via the tax board if less than R1 million or the tax court in all other cases). You can initiate ADR by indicating that you wish to make use of the ADR process in your notice of appeal. Within 30 business days of your notice of appeal, SARS will inform you whether the matter is suitable for an ADR process. The ADR process must be concluded within 90 days. If the dispute is resolved between you and SARS, it must be recorded and signed by you and a SARS representative. A settlement agreement must be approved by a senior SARS official. SARS will issue, where necessary, a revised assessment to give effect to the agreement reached by ADR. If the dispute is not resolved by ADR you may continue to appeal to the Tax Board, if the tax in dispute is below R1000 000, or the Tax Court. Again, I want to stress out the need to consult a professional Tax Practitioner to assist you with this process. if you have gone through all these processes and have now won your case against SARS (where SARS issued unnecessary assessment without proper foundation), may you recover wasted costs incurred (consultations with lawyers and tax practitioners or accountants fees) through the unnecessary conduct of SARS officials? The decision to use the services of professionals rests on the taxpayer. However, it goes without saying that the complexity of tax laws and regulations renders it necessary for one to consult with tax lawyers, accountants and tax practitioners. Currently, there is no formal authority covering whether taxpayers can recover their costs from SARS. But, practices in other tax jurisdictions allows taxpayers to recover damages in cases where they have suffered financial losses due to the conduct of the revenue authorities. In South Africa damages may be awarded by a competent court if the taxpayer can prove that he/she suffered financial loss as a result of the conduct of SARS. Leave a message Subscribe now:
Why do Small businesses fail?
Why do Small businesses fail? According to statistics, 50% of small businesses fail within 24 months of launch. According to research and report by the UWC, between 70% and 80% of small businesses fail with 5 years. This is a significant number of small business that fails. The consequences of this to the economy and unemployment are significant. But what exactly closes doors for small businesses? Lack of planning: Most businesses are brought into existence for survival. The business owners simply register a company and hope everything will just be fine. There is no detailed plan on how the business is going to be run. There are no well defined short-term and long-term goals. As a result, there is no understanding of costs, responsibilities, markets, funding needs and other requirements of the business. Before long, the owners of the business run out of steam and find themselves back to the drawing board. Therefore, it is critical for business owners to have a clearly defined plan for their business. Also, a business data room that contains all critical information about the business is essential. This will come in handy when talking to investors or when seeking funding. One-person show: In small businesses, often the owner is the go-to person. They are the main source of contact for everything to do with the business. They deal with customers, suppliers, employees, production, admin, dealing shareholders and putting out fires in general. This leaves them with little time to run the important aspects of the business. They have no time allocated for growing the business and attending to strategic issues relating to the business. This is why it is important for business owners to identify, early on in the business, aspects of their businesses that they can hand over or delegate to their assistants or other people in the business. This will, in turn, free up their time to focus on what matters. According to the UWC report, personal initiative and goal setting are consistently related to business success. In other words, a business owner who is always reacting instead of proactively dealing with issues is more likely to fail than one who proactively deals with issues. Failure to separate personal and business accounts: You often hear people say, “This is my business. This is my money. Why can’t I get the money out?” We have dealt with one such business before. The owner had a gambling problem. As a result, he spent over a million rands over two years in gambling. None of the winnings would come back to the business and no taxes would be paid over to the authorities for the business. While this business is still there, it consistently had cash flow problems and may not be around for a very long time. Using a company account as a personal account will no doubt cause a lot of confusion. Business owners will struggle to keep track of their costs and will find it difficult to measure their profitability. Secondly, they will create significant loans accounts in the business, which will be difficult to clear. As a general rule, business owners should decide on how much they need to survive on a monthly basis and pay themselves a salary from the business, obviously taking into account the cash flow and tax implications of doing so. Secondly, one should not owe the business unless they have a solid plan of paying or reducing this loan in the future. Lack of proper records and financial systems: Many small businesses lack proper financial records and systems and technology. This could be related to the fear of the cost or fear of the unknown when it comes to technology. But, many businesses that have adopted cloud accounting and other technologies have achieved efficiencies in a number of areas of their business. This is so because they no longer spend a lot of time on manual processes. Having data in real-time has also improved the way and quality of decision-making in many small businesses. For many small businesses, technology should not be seen as a threat but as an ally. Small business should, therefore, be proactively looking for technology solutions before the lack of it throws them out of business. Late payments by larger businesses: According to Moneyweb, Kenya is considering making late payment of suppliers a criminal offence. This shows you how big this problem is. In South Africa, many government departments are known for paying way too late. In the Western Cape, the City of Cape Town is in a legal battle with a water supplier they asked to build a desalination plant in the Water Front. The company built the plant with over R37 million of their money, but to date, only about R4 million has been paid. For any business, cash flow is anything. Small businesses also need to pay their suppliers who may in themselves also be small businesses. So, a call on large companies to pay their suppliers in time should become even louder than it is currently. Government departments should also look at how they can process supplier payments quickly. We also hope the new dawn that is sweeping through the country will also deal with officials who ask for kickbacks from these small businesses. Passion is not expertise: Passion is not a substitute for experience. In fact, experience is a bad teacher. Often one only learns from it after a mistake is already made. So, it is important for small business owners to stay ahead of their game by attending managerial, business management, finance and tax training. Do not wait until it is too late for you to learn. Have an interest in your numbers and finances as much as you do in your money and bank balance. Poor management: Ever heard people say, “People do not leave jobs, they leave managers?” When hiring managers, one needs to get someone who has a passion for developing and listening to people. When