What price survival of owner-managed businesses? It is common knowledge that an unacceptably high percentage of businesses fail within two years of startup; many others fail later.
Why? Ask a failed entrepreneur this question and you will invariably be given a reason like: “the market turned against us”, “the strong rand made us uncompetitive” or “the banks were unsympathetic to our needs”.
In a recent newsletter to clients of Meredith Harington, Chartered Accountants, Peter Meredith commented that business failure could more often than not be attributed to poor management - in particular:
- Entrepreneurs, who invariably have good technical skills required for their industry, lacked management and
- Lack of a proper business plan, including
· a mission statement
· market analysis
· product costings
- No budgets and cash flow forecasts
- Lack of an appropriate financial reporting system which reports monthly on variances from forecasts
- No regular professional financial advice
What cost proper administration?
Business people understand clearly the relationship between the costs of materials and labour, and sales revenue. They also accept the necessity of costs relating to accommodation, equipment, marketing, distribution, communications and interest.
BUT certain costs which might be critical to survival, are often seen as “unproductive”, ie. they produce no direct revenue, and hence should be kept to a minimum, and even postponed where possible. Such costs include:
- the employment costs of accounting and administrative personnel
- the costs of outsourced monthly management accounting
- if appropriate, outsourced payroll
- the cost of tax and other regulatory compliance
- the cost of protecting rights, including proper legal agreements
- audit costs
- regular professional consultations
Skimp on such costs at your peril – the cost of “saving” on vital administration costs might include:
- penalties and interest on unpaid taxes - even criminal conviction for non-compliance
- SARS audits of income tax submissions
- prosecution under money-laundering, financial institutions or financial advisory legislation
- CCMA disputes arising from non-compliance with labour legislation
- liability of taxes, penalties and interest arising from underpayment of VAT and PAYE
- substantially higher accounting costs as a result of inadequate financial recording in the first place
- declined loan applications and the lack of credible financial information or lack of independent audit.
So, what should a business expect to pay?
While it will never be possible to generalise and each business will make choices as to the quality of its operations, certain costs are inevitable. It is most unlikely that the total cost of the administration of an owner managed company, including personnel costs, should be less than:
0 - R1m 8% of turnover
R1 -10m 7% of turnover
R10 - 30m 6% of turnover
R30m + 5% of turnover
Almost always the cost of rectification far exceeds the costs of doing things properly first time. Also for financial information to be useful it must be timeous.
In this age of sometimes excessive regulation, businesses simply cannot afford to omit the costs of necessary administration from their monthly cash flow budget. Those that prosper will agree.