Every business has various daily costs and expenses that result from its trading activities. Some of these may change over a short period of time while others are fixed. You will find that as your business thrives, managing those expenses becomes difficult. Even more so if your primary aim is to maximise cash flow and profits. There is no way of maximising cashflow without keeping a tight control over both fixed and variable expenses.
First, you need to evaluate where your business is now and where you want to take it in the future. Secondly, you need to have a well thought-out road map that will help you to forecast expenses and provide for contingencies properly. Most business owners won’t have the time, or the know of preparing budgets and forecasts, so it is always advisable to consult with an accounting firm.
In this blog post, we examine some of the tried and tested ways accountants use to manage company expenses.
1. Budget planning
The two most crucial financial tasks for managing expenses are budgeting and forecasting. Budgeting will keep your business from overspending while forecasting will prevent you from getting into trouble with making payments.
What’s the difference between the two? The key difference between a budget and a forecast is that a budget lays out the plan for what a business wants to achieve, while a forecast states its actual expectations for results, usually in a much more summarised format.
A forecast will give a short-term representation of the actual circumstances in which a business finds itself. The information in a forecast can be used to take immediate action.
2. Tracking expenses:which ones you should track?
As I have mentioned above, every business incurs various daily costs that result from its trading activities. Financial Management helps business owners to understand their company expenses and how to track those expenses. This requires gathering data in an effective way. Another benefit of tracking expenses is that it saves you a lot of money. You will also know where money goes or how to spend it.
2.1 Variable Costs
An accountant will pay attention at your company’s past variable expenses and calculate what percentage of sales they represent. That will serve as a good indictor of potential future costs and a benchmark to use in keeping those costs in line with selling activity.
Costs that vary directly from one additional sale or manufactured product are called variable costs. These mostly contribute to gross margin calculations and are directly related to generating stock or sales.
Variable Cost examples include:
- Cost of sales
- Raw materials used for production.
- Travel, entertainment and hotels.
- Transportation costs
- Sales commissions and bonuses, etc.
2.2 Fixed Costs
What are fixed costs? A fixed cost is an expense or cost that neither increases or decreases from changes in sales made or units produced. Put differently, Fixed Costs do not change on a daily, monthly or quarterly basis apart from small inflationary increases over time.
People tend to become complacent about fixed costs because they are generally recurrent and often reflect long-standing relationships with suppliers. But you should periodically test the market to see if you can get a better deal from competing suppliers.
Examples of Fixed Costs include:
- Monthly rental payments.
- Municipality rates.
- Office premises electricity and petrol.
- Staff salaries, pension payments and UIF.
- Water rates, broadband and telephone line rental.
- Mortgage and loan repayments.
- Vehicle leasing and maintenance.
- Accounting and legal.
- Most marketing and advertising, etc.
3. Income Tax
Like any other business owner you will be liable to pay company tax in South Africa. How much business tax you pay and what deductions you can claim will depend on the size and type of your business.
Business taxes can be complex, covering multiple categories like income tax, estimated taxes, self-employment taxes, withheld taxes, and excise duties. If you aren’t prepared for these expenses, they can take you by surprise.
Types of business tax South Africa
- Income tax
This is the standard tax on income for all registered companies in South Africa.
- Turnover tax in South Africa
Turnover tax is an alternate, simplified method of business tax in South Africa. It is a tax for small business in South Africa with an annual turnover of R1,000,000 or less.
- Dividend tax in South Africa
Dividend tax in South Africa is imposed on dividends payments to shareholders at a rate of 15 percent.
- Value Added Tax (VAT) in South Africa
VAT is an indirect tax payable by some companies in South Africa. The VAT rate in South Africa is currently 15 percent on the supply of most goods and services (with some exemptions) and on imported goods.
Businesses must register for VAT if their annual turnover exceeds R1,000,000 but they can also register voluntarily if they wish.
- Skills Development Levy (SDL)
SDL is a tax in South Africa payable by employers to promote the learning and development of employees in South Africa. Employers become liable for SDL if their total annual salary bill is more than R500,000. It is charged to employers at a rate of 1% of the total salary bill.
4. The Best Way to Track Your Expenses: Cloud Accounting
Accountex predicts that by 2020, more than 90% of small business owners will be using cloud accounting software. Ultimately this will facilitate accuracy, reliability, consistency and ease of reporting. Some of the best expense management tools include ProcurementExpress.com and Sage. These solutions even provide a mobile app that lets you track expenses while on the road.
5. Manage your accounting books effectively
Poor financial management may affect every aspect of your business, from managing cashflow and tracking business performance to developing plans that ensure that business owners can make the most of opportunities.
Track your expenses by managing your accounting books effectively. If you don’t have the time to do it, let an accounting firm manage your books for you.