“[Taxpayers] should give at least the same priority to tax obligations as their other responsibilities.” (SARS’ Short Guide to the Tax Administration Act)
Given the significant negative implications this could have for a taxpayer, whether an individual or a company, there are certain procedures SARS must follow before it can collect tax debt via a third party appointment or another collection method, and individual and business taxpayers are well advised to understand how a tax debt can arise without their knowledge, and how to prevent SARS from collecting such tax debt from their bank accounts without their consent.
What is a tax debt?
While filing correct returns and making payments on time will protect taxpayers from tax debts, penalties and interest, taxpayers may not be able to meet these requirements on time for a range of reasons.
As such, administrative penalties on late or non-submission of tax returns, failure to submit tax returns, the submission of returns without payment, or partial payment of a tax liability can all result in a tax debt, which can also arise from a SARS assessment, or from an audit.
How can a tax debt be collected?
SARS’ powers to collect tax debt are extensive, and include:
When can SARS collect tax debt?
If you cannot pay a tax debt to SARS and do not follow the correct procedures, SARS is legally allowed to exercise its powers of collection as detailed above, even if you are disputing the debt!
Fortunately, SARS must also follow the correct procedures. These include that the taxpayer must have received an assessment from SARS detailing how much is due and by when, as well as a final demand for payment that states available debt relief mechanisms contained in the Tax Administration Act (TAA); and recovery steps that SARS may take if the tax debt is not paid.
Only 10 business days after delivery of the final demand, if no response has been received from the taxpayer, can a senior SARS official authorise a third party to collect the tax debt.
If SARS does not follow these steps detailed in the TAA, collection proceedings may be regarded as illegal and in contravention of the TAA and the taxpayer will have recourse against SARS via its Complaint Management Office (CMO), the Tax Ombud or legal action.
But, of course, prevention is far better than cure.
How to prevent SARS from taking money from your account
For example, taxpayers who can prove serious financial hardship can apply to SARS for a reduction of the amount within 5 business days of receiving the final demand or extend the period over which the amount must be paid. If the debt is to be disputed, taxpayers can apply for a suspension of payment. Where the tax debt is not disputed, but cannot be settled immediately, taxpayers can either apply for a payment arrangement over time; or can request a debt compromise.
In all these instances, professional assistance is strongly recommended.
“A diligent buyer will want up to five years’ worth of profit and loss statements, bank statements, tax returns, leases, supplier and vendor contracts, and customer data.” (Barbara Findlay Schenck – Author “Selling Your Business for Dummies”)
The reasons why a business owner might decide to sell their business are many – perhaps to pursue a new or more exciting business opportunity, relocation, health reasons or retirement. Selling a business to family, to the other partners, to a loyal employee or a group of employees could also be part of a succession plan; or the business owner’s exit strategy may involve selling to an outside buyer, perhaps a competitor, a supplier, or a customer, or even an investor.
Whatever the reason for selling, a smooth transition requires:
The outcome of this approach is a business sale to the right buyer at the right price, with little to no disruption to business operations and no negative impact on staff morale or other stakeholder relationships.
Plan well and far ahead, and beware the tax implications
Planning well and ahead provides more control over the process, as well as time and opportunity to strategically enhance the business to ensure its full value is realised when you sell, and also ensures financial and tax implications are well understood.
As just one example, the disposal or deemed disposal of assets, including the sale of a business, will attract capital gains tax (CGT), levied at a stiff 18% for individuals.
Planning to Retire? Do you know about this CGT relief?
There is fortunately some CGT relief – little-known but very advantageous – if you are older than 55 (or in situations where the disposal is “in consequence of ill-health, other infirmity, superannuation or death”) of up to R1.8 million on the disposal of an interest in a small business; or of active business assets of a small business; or the sale of a small business. Of course, many conditions apply, including that the total active business assets of the taxpayer do not exceed R10 million and that the R1.8 million exclusion is cumulative over the taxpayer’s lifetime.
Such a single tax implication can make all the difference between a profitable sale and one that is not. For example, let’s say you bought shares in a company 7 years ago for R2 million, and have since been actively involved in running the business. You decide to sell your share for R4 million, triggering a capital gain of R2 million. At 18%, the CGT liability would be R360,000. If you are over 55 years of age and meet all the other conditions, applying the R1.8-million exclusion would mean only the remaining R200,000 is taxed at 18%, reducing the tax liability to R36,000.
Seek professional advice
Consult with your accountant to ensure that you understand all the potential financial and tax implications of selling your business and ensure that the necessary legal documents are in place, such as non-disclosure agreements for potential buyers and a legal sales agreement. Ask your accountant whether you should consider employing a business broker.
Finding fair value
As the seller, you want to ensure that you get the best possible return for the money, time and effort invested in your business. Similarly, all potential buyers want a business that is financially stable and profitable and that will deliver a good return on their investment.
To set a fair price, you will need to determine the value of the business, and the expertise of an accountant or a professional valuer is highly recommended. This is because there are different ways of valuing a company, as well as many factors – mostly intangible – that affect the valuation beyond simply the financial reports.
This means choosing the right method for valuing your business is important because it will influence the price you can ask for it. The three common methods used to evaluate a business are asset-based valuations (difference between assets and liabilities, also called the book value, net asset value or equity); market-based valuations (considers comparable sale prices for businesses sold in the industry); and income-based valuation (average profit year-on-year for at least the last three years), together with a profit forecast for three or more years ahead.
All of these valuations will be influenced by factors such as location, the condition and age of equipment and fittings, new competitors in the market, branding and goodwill, reputation and customer loyalty.
Get your financials in order
To determine a fair value for your company, you will need a comprehensive picture of the company’s financial situation. Potential buyers, too, will want to see full financial records.
Paperwork required
In addition to the above, prospective buyers will likely request records to assist them in conducting a due diligence, which is an investigation or review of factors that influence value or market price, some of which are listed below.
Managing stakeholders
Selling a business can take months – if not years – and during this time, business owners should maintain ‘business as usual,’ while also making the business more attractive to potential buyers by establishing a clean and friendly working environment, keeping equipment well-maintained, and improving processes.
It will also be important to manage relationships with stakeholders when it becomes known that the company is up for sale. Employee morale may be impacted if they are fearful of losing their jobs or of a change in working conditions or status. Clients may feel uncertain about receiving the same level of service, while suppliers and creditors may be concerned that the business will continue to honour its commitments. It is advisable to be upfront and honest with everyone concerned before announcing the sale or engaging with prospective buyers.
Duty of care
Among the responsibilities of business owners is the duty of care – a legal duty to take reasonable care not to cause harm when it could be reasonably foreseen.
This duty is certainly relevant when selling a business and creates a legal responsibility or obligation not to omit any information, procedure or activity when it can cause harm to others or the business, including physical harm or financial ruin, and intangible damages such as reputational damage.
In line with this, if you are thinking of selling your business, you are well advised to enlist professional assistance from your accountant to ensure the best possible outcome for all concerned.
“I would borrow money all day long, if the cost of borrowing is less than the expected return.” (Brad Schneider, American congressman)
At some point it’s more likely than not that your small business will require a business loan. A 2021 study done by Fundera (a US financial resource business that sources financing for small businesses) suggested that 56% of all small businesses will need a loan to expand operations, pursue new business or acquire business assets. The same study found that 29% of small businesses fail simply because they run out of capital.
Knowing that you need additional funding is not the same as acquiring it though. Other than angel investors there are two principal ways in which a company gains the financing it needs when cash flow is in short supply: a small business loan or a line of credit. But what are these? What are the differences? And how do you decide which you need for your business?
An overview
Essentially, small business loans and lines of credit are similar. They are both ways that businesses can borrow money from lenders and approval is determined based on past financial behaviour, the borrower’s credit history and their established relationship with that lender.
A traditional loan is a non-revolving credit limit, which means the borrower will be paid out funds once and will then be required to pay the money back, with interest, at a set rate and over a set period. A loan can be granted either “secured” or “unsecured”, meaning it is either backed by collateral or not, and the interest rate charged will depend on the risk to the lending institution, with lower rates available to those with collateral. With a loan, interest accrues immediately upon pay out either in cash to the company, or through payments to other firms where assets are purchased. Examples of loans that may impact a business include car loans, property financing, debt consolidation and commercial loans, which allow companies to hire extra staff, or continue day-to-day operations.
A line of credit is different in that it offers the borrower a maximum amount that they can withdraw at any given stage and payments are made back based on the amount withdrawn and the interest accrued. Provided the borrower keeps up with the terms of the arrangement, this amount is available indefinitely and can be topped up and withdrawn at will. Generally, the interest rates on a line of credit are higher, and the amounts smaller than those offered for a small business loan. Interest only accrues when the line of credit is being used. Should it be fully paid up, then nothing is owed.
Which is right for your business?
Determining which of these loan types is best for your business will require you to look at a few factors.
If the cash injection needed is large or you need to make significant equipment, vehicle or property purchases then a loan will almost always be the correct solution. With lower interest rates and set monthly fees that are easier to account for in a monthly budget, a loan will help you secure what you need, while also keeping costs as low as possible.
Credit lines are better when the amounts needed may be smaller, but more frequent. It is therefore vital for you to know exactly what money you need, and what you intend to use it for before you approach the lender.
As one-off payments or cash injections, loans don’t allow a lot of space for adjustment after they are issued and rarely offer any form of protection in difficult conditions.
A line of credit can, however, give you access to extra working capital with no restrictions. Having a line of credit ready to go when needed is a good way to ensure small, unforeseen problems can be negotiated. Late payment by a critical client shouldn’t mean you can’t pay your bills on time.
Lines of credit offer a great deal of flexibility for you assuming you’re not sure how much money you will need, or if you expect your expenses to be spread out over an extended period. A line of credit also offers options when it comes to monthly payments, as, provided you meet the minimum payment, you can pay back as much or as little as you can afford.
Loans, however, provide the better option when flexibility is not an issue, and your main aim is to limit the amount of debt you take on.
Before applying for any business credit, it’s advisable to speak to your accountant to evaluate just what needs to be accounted for in the financing and what you can reasonably expect to pay back each month. Knowing exactly which potential costs are going to be vital to assist your company’s growth, and which are nice-to-haves, will enable you to make the right decisions when it comes time to choose what kind of financing you are looking for.
“In a way, fraud in business is no different from infidelity in marriage or plagiarism in scholarly work. Even people committed to high moral standards succumb” (Miroslav Volf, Director of the Yale Center for Faith and Culture)
Fraud (in this context) is the act wherein an employee or trusted partner makes a financial gain through criminal behaviour or deception within an organisation and it is extremely common. Recent studies suggest that as much as 46% of all companies will succumb at some stage or another. Given this, much thought has been put into how to prevent fraud and lower the impact that it can have on a business. Unsurprisingly, the issue is extremely complex and there is a lot that you as a business owner will need to do if you want to avoid the financial loss and reputation damage that fraud can cause to your business.
What is fraud?
Business fraud has many aspects, and generally comes in three defined categories:
This is the most common type of fraud. Some numbers suggest that 90% of all fraud is this kind, in which employees will either steal or exploit their company’s resources. Examples include where employees make false expense claims, help themselves to cash or even non-cash items, the creation of ghost employees, “buddy clocking” systems or under recording of the cash that is received for goods.
Significantly less common than asset misappropriation these schemes are, however, significantly more damaging to the company itself. This is the deliberate manipulation of financial statements to mislead those who would use those statements for legitimate purposes. Usually, this is done to make a company appear more profitable than it is, or to avoid tax payments.
Corruption occurs when employees use their influence or positions in a company to benefit themselves to the cost of the company or agency for whom they work. An example of this would be when someone agrees to hire a less than ideal candidate because they are being paid a kickback to do so.
Tips for detecting and preventing fraud
According to the Association of Certified Fraud Examiners the average fraudster will operate their scheme for 18 months before getting caught. The reason for this according to employers’ reports is that quite often it was the employee they least suspected
It is therefore vital to have regular feedback sessions with employees, even those who have been with the company for a long time, to discuss their personal circumstances and be aware of any significant changes in their lives. Someone who has been a model employee for years, may, due to changes in their life’s circumstances, feel they have no choice but to steal to make ends meet.
Look for those employees whose habits have suddenly changed or who exhibit a change in attitude. These habits can point to problems in their personal lives, or potential bitterness at their employer resulting from perceived slights they may have received, such as a poor raise, or lack of promotion.
Set up a fraud policy and communicate this to all staff. Staff should be aware that management is fully clued up on all the types of fraud, knows what to look out for, is actively searching for it and that the punishments for being caught will be severe.
In doing this you also trigger honest employees who are not tempted by fraud to become aware of the signs and symptoms of fraud and empower them to report suspicious behaviours to you. Refer also to ‘Be Available’ below.
This is potentially the most important step as it is not subjective. It is extremely important to set up systems within your company which safeguard the company’s assets and ensure the integrity of record keeping. The first step is to make it abundantly clear to whom responsibility lies in each situation. Do not, for instance, leave the key to the petty cash in a cupboard, but rather assign one staff member to take full control and sign for all expenses and payments into the cash box.
Use a paper trail and have those responsible for each transaction or sale personally sign for each element of their part of the process. If the preparation of bank deposits is personally signed for in a ledger that is then passed to a manager, then it becomes much harder for either of those parties to deny their role in the process.
Make sure all payments are authorised, that purchase orders and invoices are numbered consecutively and cross referenced to prevent the passing of false invoices. Require new vendors and employees to be personally vetted and authorised by a senior manager to stop ghost accounts from being set up. Require two signatures on any payment above a minimum amount.
Internal controls need to be re-examined regularly and any discrepancies with the procedure followed up with rigorously. Don’t be afraid to bring in an external team to set up these procedures for you should you not have the means to do so yourself.
This may sound strange to anyone who has never dealt with fraud, but one of the surest signs that something suspicious is going on is if an employee never goes on holiday. On the surface, these employees may appear to be diligent hard workers, but the truth is much more likely that they are afraid of having their schemes uncovered should they allow someone else to do their jobs when they are on leave.
Your best line of defence is your other employees. Being the kind of business owner who has an open door, is approachable and who listens is the best way to ensure that honest employees come to you if they have any suspicions. They should know that you are trustworthy, and that their names will never come up in any discussions you have with the people they have pinpointed. At the end of the day, having everyone looking out for you, is much better than trying to do it all yourself.
Companies do not operate in a vacuum. Many of the services you use may need to be brought in from the outside and when it comes to your finances it’s vitally important that these companies are reputable. Good bookkeeping services will be at the frontline of defending your company from fraud and will be able to quickly pick up discrepancies in the books. Therefore, when hiring any professional who will have access to your accounts and books it is vital that they be registered with the relevant professional bodies and that they come with a reputation for integrity and providing top-class service. Ask your accountant’s opinion in any doubt.
Once a month pick random employees and go through their expense accounts, travel allowances and claims for cell phone usage to make sure that these are on par with what is expected and do not ring any alarm bells. If they have signing powers take a close look at what they are signing and the reasons and flag any unusual signatures for a follow up. Even if you only do this for one employee a month it will be known that you are checking, and that any fraudulent activity will ultimately be caught.
Reconcile your bank accounts at the end of every month. Ideally, this should be done by an independent person who does not have bookkeeping or cheque signing powers within the company. This person should also check invoices and payments (EFT or Credit card) to make sure they are cross referenced.
They should then sign off on the reconciliation personally.
It is impossible to close all the gaps that fraudsters may use to take advantage of your company, but if you implement the above changes and controls you will either deter them from trying or find them quickly once they have started. The best tip is vigilance, both by you and your honest employees. Building an honest and open company culture that fosters communication will ensure your employees are both aware of what needs to be done and open to telling you when it isn’t.
“The moment you make a mistake in pricing, you’re eating into your reputation or your profits.” (Katharine Paine, founder and CEO of KDPaine & Partners)
It may seem a simple concept but getting your pricing right is an integral part of any business’s true sustainable success and can be a critical part of its failure too. Bad pricing leads to missed deals if you are too expensive, and lost profits if it you are too cheap. It also leads to painful brand damage as high prices can make your business seem aloof and out of touch, while low prices can make good products seem to be of poorer quality than they really are.
Harvard Business Review says that a 1% improvement in a company’s pricing can make an enormous difference to a company’s bottom line.
“For a company with average economics, improving unit volume by 1% yields a 3.3% increase in operating profit, assuming no decrease in price. But, as Exhibit 1 shows, a 1% improvement in price, assuming no loss of volume, increases operating profit by 11.1%,” says McKinsey & Company pricing expert Michael V. Marn in “Managing Price, Gaining Profit” here.
One study by OpenView of over 400 business pricing strategies, revealed that 84% of respondents reported at least a 10% increase in annual recurring revenue (ARR) after a pricing change and even more dramatically, 25% reported an increase of at least 50%.
How do you know if your pricing model is wrong?
It is clear to see that pricing strategies can have a huge impact and that quite often a lot of money is either being left on the table, or deals are missed because of incorrect pricing. But how do you know if your products have been priced badly? Here are a few of the critical signs to look out for if you don’t want to become a victim of your models.
Pricing needs to take into account all expenses and then add a profit on top of that. Making sure you include all your costs in this expense calculation is critical to being able to build a thriving business. While most people will remember to include staff costs, advertising, property costs and the cost of raw goods, there are numerous other costs that must not be forgotten such as licensing costs, shrinkage, employee discounts and seasonal fluctuations in raw product costs. If you are struggling to realise your true financial situation approaching your accountant will be absolutely key to your efforts going forward.
According to Bain & Company there are three main behaviours in pricing that pinpoint the top achieving businesses. Those companies that make the most profit do so by:
What is clear is that in this space there is no call for cost-plus pricing.
The savvy business owner does not leave their pricing to chance. The rands and cents that you let leak away through missed deals or profits not taken could one day be the difference between a booming organisation and bankruptcy.
“South Africa is aligned with the practice in many other countries of granting tax relief for medical expenditure.” (SARS)
In South Africa, tax relief for medical expenses is provided through a medical tax credit system. This means the tax relief is provided as a tax rebate – a reduction in tax payable.
If you are a non-provisional taxpayer, you have only a few more days to ensure you have claimed all these rebates.
SARS allows two types of medical tax credits.
How SARS defines disability
It is important to note that the definitions used by SARS to define a disability for the purposes of the tax rebate are not the same as the definitions used in general.
For tax purposes, a disability is defined as a moderate to severe limitation of any person’s ability to function or perform daily activities, as a result of a physical or sensory or communication or intellectual or mental impairment.
For a disability – whether physical, sensory, communication, intellectual or mental – to qualify for a SARS tax rebate, it must be diagnosed by a duly registered medical practitioner trained to diagnose the applicable disability or to express an opinion thereon and must also last, or have a prognosis of lasting, for more than a year.
However, a diagnosis alone is not sufficient. For each type of disability – physical, sensory, communication, intellectual or mental – listed in SARS’ definition of a “disability,” there are prescribed diagnostic criteria that assess the functional impact thereof on a person’s ability to perform daily activities.
In real life – with a practical example
An example will help to clarify. Let’s say a taxpayer’s dependent has been diagnosed by a medical practitioner with a mental disability such as autism spectrum disorder, which includes among others autism, Asperger’s syndrome, and childhood disintegrative disorder.
SARS will use the prescribed diagnostic criteria below to determine if the dependent’s condition qualifies as a mental disability for the purposes of claiming a tax rebate.
“With the exclusion of intellectual disability, a person is regarded as having a mental disability if that person has been diagnosed (in accordance with accepted diagnostic criteria as prescribed in the Diagnostic and Statistical Manual DSM-V) by a mental health care practitioner who is authorised to make such diagnosis, and such diagnosis indicates a mental impairment that disrupts daily functioning and which moderately or severely interferes or limits the performance of major life activities, such as learning, thinking, communicating and sleeping, amongst others. A moderate impairment means a Global Assessment Functioning Score (GAF-Score) of 31 to 60. A severe impairment means a GAF-Score of 30 and below.” (SARS)
Similarly, physical, sensory, communication and intellectual disabilities have their own prescribed diagnostic criteria.
This means that whether or not a certain disability – whether physical, sensory, communication, intellectual or mental – will qualify for the medical tax credits, can only be determined on a case-by-case basis.
Tax credits for other physical impairments and brain dysfunctions
In cases where a condition does not meet the prescribed diagnostic criteria to qualify as a disability (and is therefore “less constraining” than a disability as defined), the taxpayer may still be able to claim some medical tax credits for expenses for physical impairments related to the condition. These include, for example, poor eyesight, hearing problems, paralysis and brain dysfunctions such as dyslexia, hyperactivity or lack of concentration, but excludes medical conditions such as diabetes and asthma.
Which expenses may be claimed
SARS further publishes a prescribed list of physical impairment or disability expenses, which, in addition to other qualifying medical expenses including out-of-pocket expenses, can be claimed if you have paid for and not recovered such expenses.
The current list includes for example:
However, just because an expense is listed, it does not automatically qualify as a rebate. To qualify for the tax rebate, the expenditure must be “necessarily incurred,” and paid by the person “in consequence” of a qualifying disability – whether physical, sensory, communication, intellectual or mental – or physical impairment that does not qualify as a disability according to SARS’ definitions.
For example, if a person in a wheelchair who has no visual impairment buys a hand-held GPS, the cost of the hand-held GPS will not qualify as a deduction even though the expense appears on the list. This is because the hand-held GPS is not “necessarily incurred” in connection to this person’s disability. In the case of a visually impaired person, the cost of the hand-held GPS may qualify as a deduction.
SARS says the guiding principle is to identify those additional expenses a person with a disability would incur, without which the person would not be able to perform the activities of daily living.
For example, part of the school fees paid by taxpayers whose children living with a disability attend a private special education needs school, can be claimed. The amount that can be claimed is currently the difference between the fees paid to a private special needs school and the closest fee-paying private school, or the difference between the fees paid to a public special needs school and the closest fee-paying public school.
How much tax relief can you get?
Because the AMTC is a rebate against taxes payable, it is limited to the tax payable before the offset of employees’ tax and provisional tax, and does not create a refund, nor can the excess be carried forward to the next year of assessment.
How much you can claim also depends on whether it is you, your spouse or child that has a disability, or whether it is another dependent that has a disability, or if the claim is for physical impairment where the condition does not meet SARS’ definition of disability.
If you, your spouse or child has a disability, you can claim 33,3% of the qualifying out-of-pocket medical expenses (which includes disability related expenses), paid by you (and not recoverable) during the relevant year of assessment, as well as 33,3% of the fees paid (if any) to a registered medical scheme or qualifying foreign fund that exceeds three times the amount of the medical scheme fees tax credit (MTC) to which you are entitled.
If a dependant other than your spouse or child (such as a parent or sibling) has a disability, or if the claim is in respect of physical impairment (rather than a disability as defined by SARS), qualifying medical expenses may still be claimed, subject to more limitations.
These include that AMTC is limited to 25% of the amount by which the sum of the amounts listed below exceeds 7,5% of the taxable income:
What are the requirements for a successful claim?
The tax rebates for qualifying medical expenses can only be claimed in the year of assessment during which they are actually paid.
You can claim the qualifying medical expenses when you submit the income tax return (ITR12) for the relevant year of assessment. The deadline for this year is 24 October.
For SARS to consider the deduction of qualifying expenses in respect of the disability you will need a completed “Confirmation of Diagnosis of Disability form” (ITR-DD form) as supporting evidence of the disability.
The ITR-DD form is completed partly by the taxpayer and partly by a duly registered medical practitioner who is trained to diagnose the applicable disability or to express an opinion on the disability.
You are not required to submit the ITR-DD form with your income tax return. However, in the event of an audit or inspection SARS will request a copy, which must then be produced.
As with any tax rebate, it is always advisable to check in with your accountant and rely on professional assistance to ensure you minimise your tax bill that is due before the end of the month if you are a non-provisional taxpayer.
“If you can’t measure it, you can’t improve it.” (Peter Drucker)
Metrics are defined as a set of numbers that give information about a particular process or activity. In a business context, a metric is a quantifiable measure used to track, monitor and assess the performance of various business processes.
Also known as key performance indicators or KPIs, business metrics allow you to track the growth and performance of a business, so potential problems can be identified and effective solutions developed, and well-informed decisions can be made.
There is a range of metrics that a business can track in terms of sales, financial results, human resources, customers and work progress. In the complex world of business today, using just one or two metrics will not provide a complete overview of the business performance. For example, focussing only on the sales revenue metric may create the impression that the company’s performance is on target, when adding the net profit and gross margin metrics will reveal a more accurate picture.
To truly gauge your business’s performance, you need to measure your growth in a multitude of ways, tracking the relevant metrics together for a big-picture understanding of performance across the various functions.
The 9 key metrics
The selection for your specific business should be based on your own business’s unique goals. However, where the aim is to increase profits and maximise growth, 9 key metrics will enable you to track, monitor and assess the performance of various business processes.
Sales revenue or income is the key metric every business uses to measure its financial performance.
It is measured by adding up the income from sales, less any costs associated with returned products and/or refunds. A further, related metric that is more indicative of your business’s financial performance is year-on-year revenue growth.
These metrics allow businesses to evaluate the company’s sales, how the products or services are performing in the marketplace, and how successful the business’s marketing efforts are, compared to previous years.
Sales income can be increased through price increases, or through boosting sales by finding new customers or selling more to existing customers.
The next crucial metric every business should track is the net profit margin.
This metric determines how much profit was made by deducting all the expenses incurred from the income generated, including the cost of goods sold, interest, taxes and operating expenses.
The net profit margin compares the income generated to the costs associated with generating that revenue, effectively evaluating the company’s ability to deliver a profit. As such, the net profit margin can predict a business’s sustainability and potential for long-term growth.
The net profit margin can be increased by increasing income and / or lowering the costs of generating that revenue.
Increasing income requires more sales, which means finding new clients, and this requires access to new business leads, as well as the ability to turn those leads into customers.
This metric helps businesses establish how many new leads it gets, and from where, and how many of these leads become new customers.
Lead conversion rates can be calculated by dividing the number of new leads per month by the number of new customers per month.
This metric can be increased by, for example, extending marketing and advertising efforts to generate more leads, or by investing in factors known to increase lead conversions such as quality products and services, professional salespeople and processes, and excellent customer service.
A company’s gross margin measures the percentage of income that goes toward costs of producing your goods and services, but excluding other operating expenses, interest and taxes.
It is calculated by subtracting the cost of goods from the total sales revenue and then dividing that by the total sales revenue (multiply that result by 100 to get gross margin as a percentage). Other metrics in this regard include average fixed costs per month or unit of production, as well as average variable costs per unit of production, which depend on the number of sales, such as sales commissions and raw materials.
To calculate your average variable cost, add all total variable costs of the product or service together and divide by the total number of units delivered.
This metric reflects the efficiency of the business processes and basically states overall productivity in numbers.
This number can be increased by improving the efficiency of processes and productivity, thus reducing costs which will improve cash flow.
Cash flow is a key metric, particularly for smaller businesses where cash is crucial.
It is measured through carefully managing accounts receivable and accounts payable, as well as tracking and forecasting your operating cash flow based on the sales revenue and gross margin metrics.
Essentially, this metric shows which areas of the business are generating and using the most cash; reveals how readily a company can meet its debt and interest payments; enables informed budgeting and spending decisions; and allows potential cash flow problems to be identified and managed in time.
Tracking and forecasting your cash flow allows the business to manage this crucial aspect better, while using credit lines responsibly can help during inevitable pinch periods.
Acquiring new customers involves various costs, such as advertising or marketing, as well as the time and administrative costs of onboarding a new customer. However, these costs must be evaluated in terms of the lifetime value of a customer.
Customer acquisition costs are calculated by dividing the costs of acquiring and onboarding during a specific period by the number of clients acquired during that same time.
This metric is even more insightful when compared to the lifetime value of the average customer, which reveals how much revenue the business can expect to earn from a typical customer.
It can be calculated by multiplying the value for an average sale by the retention time for a typical customer and the number of transactions a typical customer usually generates in that time frame.
This metric highlights what is affordable in terms of acquisition costs per customer and can help distinguish higher-profit customers from those who are too expensive or difficult to convert.
One of the ways in which to improve this metric is to focus on customer satisfaction and retention.
This metric reveals how satisfied your customers are and thus how likely you are to retain their business. Satisfied customers are easily retained over the long term, make repeat purchases, and tell others about your business, generating both leads and conversions.
It can be measured through customer satisfaction surveys, or even by simply making regular calls to your top customers.
This metric can be vastly improved with a focus on quality services and/or products, and excellent customer service relationships, and this is in great part achieved through satisfied and loyal employees.
This metric measures how satisfied your employees are at your company.
It can be measured through feedback and surveys.
By regularly measuring employee satisfaction, you can address any issues timeously.
This metric can be greatly improved by treating employees fairly and creating a positive company culture they feel proud to belong to. Employees determine the overall success of the business because satisfied employees are more productive and will enhance your progress towards the achievement of the business’s goals.
Top managers need to be accessible to employees at all levels and encourage open and safe communication. Opportunities and problems with customers need to be communicated immediately to enable positive responses and action.
This metric provides insight into the company’s capacity for production and its performance in this respect, and flags potential issues. Performance measurements and performance accountability are key.
Every business has goals and deadlines, which are achieved in milestones. This means you can track progress through the number of milestones that are met, on target and/or overdue.
The company’s overall efficiency in meeting the milestones and deadlines can be improved by developing effective solutions to identified issues such as unrealistic expectations, insufficient resources and low productivity.
Tracking all these business metrics may seem challenging and time-consuming, but for improved profitability and business growth, it is crucial to do so. Your accountant will be able to assist you in tracking many of the metrics discussed and provide advice in respect of tracking non-financial metrics, allowing you to monitor and assess the performance of the most crucial business processes and to make informed business decisions.
“If you’re trying to create a company, it’s like baking a cake. You have to have all the ingredients in the right proportion” (Elon Musk)
The move to the gig economy has been in the works for years. Even before the pandemic people were leaving their jobs to “consult independently” from small towns around the big cities. Younger generations with in-demand skills found themselves capable of earning more money, and having more flexibility, while working at home, and this situation was only exacerbated by the huge retrenchments and wage cuts demanded by the pandemic.
Now, more than two years after the start of the Covid-19 crisis, gig workers and freelancers have become a common way of doing business. With greater control as to who they work for, and the ability to spread their time over multiple employers thereby lowering their risks regarding retrenchments or layoff, gig workers have more control than ever before when it comes to their day-to-day lives. The gig economy also allows its freelancers to work on new skills, while keeping up with the work necessary to pay the bills. There are, however, guaranteed downsides too. The gig economy is not as stable for those who work. Month-to-month employment is not guaranteed. Holidays are a rare commodity with client needs dictating time off rather than mental fatigue or family commitments.
Companies who hope to bring in the skills they need will have to be cognizant of both the positives and the negatives of freelance life in order to maximise the happiness of those they contract with, and so achieve the best delivery at the best prices for themselves.
Here are our tips for how the gig economy will impact businesses going forward and how best to weather the changes to benefit your brand –
A recent study here has shown that the sense of corporate culture and commitment to a brand’s long-term goals can in fact be felt by freelancers but cautions employers that they may have to change the way they have traditionally imposed this culture. In the traditional employment model commitment to a brand is driven in three ways:
The study conducted by Stefan Süß and Markus Kleiner suggests that brand loyalty in freelancers is won only through “Affective commitment.”
Affective commitment is that feeling of connection one feels to an organisation or group when they believe that their own personal goals and beliefs are aligned with those of the organisation or group and when they feel that they are an integral part of any team within that organisation. Freelancers tend to feel no obligation towards one employer and their fear of losing their job is significantly decreased by the presence of multiple employers.
Open and clear communication: If an employee is to believe they are personally aligned with a business, the brand’s beliefs and messages must be strongly communicated. It must also be clear how the employee fits within these beliefs, what their role is and how they contribute, both now and in the future.
With freelancers, companies should communicate openly, sharing its struggles and achievements. In order to feel concern for a team, the freelancer must feel trusted and part of the team.
Make the job fun: Freelancers report greater attachment to brands when they enjoy their jobs and relationships. Allowing freelancers the opportunity to take on new challenges and roles within the company and expand their initial positions will give them the variety and mental stimulation they require.
Inclusivity: Everyone wants to feel like they are liked and part of a team. Including the freelancers in activities just as you would your full-time employees gives them that sense of belonging and more importantly of being valued that is difficult to find in the freelancing environment.
Demonstrate commitment: One of the largest downsides for freelancers is the feeling that their work is always temporary or that if you hit trouble, they will be the last in line to be paid. Thinking about how you can improve freelancer wellbeing will therefore go a long way to building trust and belief in your company. This goes well beyond always paying your freelancers on time. Your freelancers are working from home and often at all hours, so consider sending them a gift basket upon completion of a job, arranging a discount for good coffee with a local coffee shop or regular check-ins with management at which they are able to offer feedback and make themselves heard.
Develop them: If you want to retain your freelancers long-term, then you need to think of their aspirations. Helping them to develop new skills and grow as people will benefit your brand in the long run in that it will position your company as being at the top of their list when it comes time to meeting deadlines and making space within their schedules.
Your HR team, therefore, needs to be trained and upskilled to take the gig economy into account when considering the employment needs of the company. They should be working directly with your accountant on a project-by-project basis to determine the most streamlined use of available resources. Your company can now work with freelancers from across the globe and those with the ultra-niche skills necessary to complete a particular task. Accordingly, HR needs to be up to the task of searching for talent wherever it may be, as well as things like international law regarding payments and tax.
In fact, your HR team may be about to become even more valuable than they have ever been in the past. Whereas once they were managing a limited team of employees, they may now be required to deal with hundreds of different people working in dozens of different locations, while keeping everyone happy, delivering proper communication and ensuring many different payment styles and preferences are adhered to and regulations complied with.
This, together with the fact that your teams will be adjusting in size and purpose a lot more in future, makes creating agile workspaces critical. Building workspaces within your own office where multiple flexible workers can use the same general space will allow them to check in, grab a coffee, have meetings and fill a few work hours without hampering their desire to work where and how they like. There should be a variety of conference rooms to accommodate teams of various sizes and excellent connectivity throughout. Teams should be able to meet around a whiteboard while patching in workers from other countries on screen, or alternatively find small, comfortable corners to share a coffee.
As an added bonus, this flexibility will also save your company a huge amount in rental for dedicated workspace and equipment and allow freelancers to come in and meet the people they are working with in a way that strengthens team cohesion and doesn’t interrupt the full-time employee’s days.
Employers should also consider the mobile nature of work outside the office. Your employee who has to pick up their kids in the afternoon, would almost certainly love to work for the hour while they wait for their child to do karate so make sure they have the means to do so. Empowering them to work on-the-go will allow them to deliver more work, more consistently and get their jobs done well, wherever they may be. A good laptop and mobile connection are now vastly more important than an office chair.
It is clear that, while the gig economy may provide some short-term disruption, the long-term benefits of working with freelancers can vastly exceed the challenges. Companies need to accept that life has changed, and the days when they employed 100% of their staff to clock in from 9-to-5 are long gone. And for many businesses it’s going to be for the best.
