Author: Susan WeDoDigital

Henry Ford once said, “The two most important things in any business do not appear on the balance sheet: they are its reputation and its people.” Nevertheless, a balance sheet is an essential financial statement for any business. It is crucial to understand what appears on a balance sheet and what it can tell you about your business.

Businesses with a strong balance sheet are more likely to survive economic downturns and be ready to thrive when times improve.

A strong balance sheet goes beyond simply having more assets than liabilities. Entities with a strong balance sheet are structured to support the business objectives of the entity and maximize financial performance.

Strong balance sheets typically exhibit most of the following characteristics: intelligent working capital, positive cash flow, a balanced capital structure, and income-generating assets.

1. Intelligent Working Capital:

A strong balance sheet will use optimal working capital (current assets minus current liabilities) to finance the core operations of the entity, with the goal of increasing revenue and subsequently profits. It’s crucial for a business to understand what the optimal level is. The challenge here is to strike a balance between liquidity and profitability, which are often conflicting strategies.

Having too much tied up in inventory, for example, can choke your cash flow and reduce your ability to meet financial obligations. On the other hand, having excess cash in the bank might represent an opportunity cost, and it could be better utilized by investing in higher-yielding assets, paying down debt, or distributing it to shareholders or beneficiaries. Many business owners neglect to regularly review their working capital requirements.

2. Positive Cash Flow:

Although it’s part of working capital, cash flow is so critical for a business that it warrants its own focus. Cash, often referred to as “business oxygen,” is the most obvious sign of a strong balance sheet. Your business cannot operate without cash flow. All businesses need cash to meet short-term objectives, such as paying employees, trade debtors, and various other expenses. Therefore, managing cash flow through forecasting, budgeting, and variance analysis is of utmost importance.

3. Balanced Capital Structure:

A strong balance sheet will use a balanced mix of debt and equity financing to maximize the return on capital employed. Debt is often a cheaper source of financing (interest is tax-deductible), and shareholders often require a higher return on their investment. However, debt always carries a level of risk; it can be rewarding when times are good but perilous when there’s a downturn.

Due to this risk, managing bank covenants is essential. Equity financing may be more expensive, but it’s considered less risky as there’s no obligation for periodic repayments. Entities with strong balance sheets retain sufficient earnings to fund growth and meet business objectives while also distributing excess funds to beneficiaries. Often, strong balance sheets result from taking on debt at the right time (e.g., when interest rates are very low). Every business is unique, and it’s a good idea to seek expert financial advice before making long-term decisions. Balance is key.

4. Income-Generating Capital Assets:

A business requires suitable capital assets to generate income, with some entities being more capital-intensive than others. Management should invest in assets that help the business achieve its financial objectives. These capital assets should be reviewed regularly, and if they are not performing as expected, they should be divested.

Strengthening Your Balance Sheet:

There are numerous reasons why a business might not have a strong balance sheet – poor financial performance, unsustainable debt, excessive distributions to owners – the list goes on. If you find yourself in possession of a fragile balance sheet, it’s advisable to consult with a business advisor to address the root cause before it’s too late. A good advisor will do three things: identify the causes of the weak balance sheet, propose processes and actions for improvement, and enforce accountability.

Meanwhile, here are a few tips on how to strengthen your balance sheet:

– Improve inventory management: If you deal with goods, review your inventory levels immediately. If inventory is aging, sell it off – the cost of holding it may be higher than you think.

– Review your procurement strategy: Do you have an annual procurement schedule, and is it adhered to? Are you buying too late and missing out on seasonal sales? Ensure someone is responsible for this function in your business and plan, plan, plan – forward focus is cardinal.

– Examine your debtors’ collection: Implement a more aggressive debt collection strategy to ensure you get paid on time.

– Identify and sell unproductive assets: If assets are not providing a healthy return, and they likely never will, then sell them. A financial ratio analysis is an excellent way to determine if your business is effectively managing its assets. You may also want to consider leasing assets rather than purchasing them, especially for rapidly depreciating assets such as those in the technology sector.

– Reduce personnel costs: In the early stages of establishing a business, personnel costs can represent a significant portion of operating expenses. By only hiring an appropriate number of staff, your business equity can get a boost. You can gradually increase staffing as your business grows, rather than anticipating a future upturn.

– Maintain a forward focus: Always ask yourself, what’s around the corner? What are the threats to your current position? What strategic plans do you need to make for the future? Your balance sheet should reflect your business strategy.

By taking steps to strengthen and maintain a strong balance sheet, your business can thrive even in the toughest times and reduce the risk of failure. Not to mention that lenders love to see a solid balance sheet with healthy cash reserves and a balanced capital structure when evaluating loan applications.

In general, a strong balance sheet makes your business more agile and provides options to shape a more profitable future. For more information on how to manage your balance sheet effectively, feel free to contact our team of experts by sending us an email at info@crs-group.co.za or by calling us at 079 495 5146.

Amid the global pandemic, the South African Revenue Service (SAID) has recently announced that employees who work from home can claim expenses related to their home office and tax deductions.

This comes as several major South African companies have informed their employees that they will be working from home until at least August 2021 due to the worldwide coronavirus pandemic.

Working from home not only benefits companies in terms of cost savings such as water and electricity expenses or rent, but it also leads to improved productivity and employee satisfaction.

Who can enjoy the tax benefit?

If you are an independent contractor, someone earning commissions, or a full-time employee working from home, you may be eligible to potentially claim tax back on your office expenses if you have worked from there for extended periods.

According to the Income Tax Act, you must be able to prove that your workspace at home meets the following requirements to be considered a ‘home office’:

1. You must have a dedicated workspace and be able to prove its existence.
2. Spend more than 50% of total working hours at the home office.
3. You have worked from this space for at least six months of the 2021 tax year.

For example, if you are an employee who worked your regular office hours for a sole employer during the tax year from March 1, 2020, to February 28, 2021, you would qualify if you worked at least half of the tax year at your home office.

What expenses can you claim?

If you meet the above criteria, you can deduct the following:

1. Office supplies and data costs.
2. Cleaning services.
3. Repairs and maintenance.
4. Depreciation of office equipment.
5. A portion of your mortgage interest or a portion of your home rent, as well as municipal rates and taxes, such as water and electricity.

To calculate your expenses related to your home, rent, rates, and taxes, the total floor area of your home office is compared to the total floor area of your entire home. For example, if your home office is 15 square meters, and your house is 150 square meters, your home office is responsible for 10% of the total floor area of your home. Therefore, you will be allowed to deduct only 10% of the relevant expenses, such as rates and taxes or interest payable on your mortgage.

If your employer reimburses you for your home-related expenses, such costs will not be taxable.

How can you claim?

You must keep accurate records of your expenses, as the South African Revenue Service (SAID) may request proof of any deductions claimed. The days you worked from home should also be documented to prove that more than 50% of total working hours were spent at home.

What are the drawbacks?

It should also be noted that claiming a tax deduction for a home office can have a negative impact on the calculation of capital gains tax if you plan to sell your property in the future.

According to the South African Revenue Service (SAID), the first R2 million of a primary residence is not subject to capital gains tax. However, if an individual indicates to the SAID that a portion of the property is not a residence but an income-generating office, that portion may be excluded from capital gains tax.

Therefore, if an individual claims 10% of their home’s floor area as an office, then 10% of the eventual selling price may be liable for capital gains tax. The inclusion rate for capital gains tax for individuals is 40% (meaning your capital gains are included in your income tax calculation at a 40% inclusion rate). However, the South African Revenue Service (SAID) has indicated that the capital gains tax calculation should take into account the duration during which an individual used their home office.

If you want to claim tax back from the SAID, we can help. Contact our team of experts by sending us an email at info@crs-group.co.za or by calling us at 079 495 5146.

Improving cash flow is crucial for the success and growth of any business, and technology can play a significant role in achieving this goal. Here there are a few ways businesses can use technology to improve their cash flow:

1. Online Invoicing and Payment Processing: One way to speed up the invoicing process is to use online invoicing and payment processing platforms. This allows businesses to easily create and send invoices to customers, and receive payments directly into their bank accounts, reducing the time it takes to receive payments.
2. Automated Bookkeeping: Utilising automated bookkeeping software can help businesses keep track of their finances more efficiently, reducing the risk of errors and saving time on manual data entry.
3. Inventory Management: Managing inventory effectively can have a significant impact on cash flow. By using technology to track inventory levels and anticipate demand, businesses can avoid stockouts and reduce the risk of overstocking, which ties up cash in excess inventory.
4. Cash Flow Forecasting: Technology can also be used to create cash flow forecasts, which can help businesses identify potential cash shortfalls and take action to prevent them.
5. Financing: Lastly, technology can help businesses access financing quickly and easily. Online platforms like crowdfunding and peer-to-peer lending can provide businesses with access to funding that might not be available through traditional lending channels.

Overall, by utilising technology in these ways, businesses in South Africa can improve their cash flow, reduce costs, and achieve long-term success.

With the start of a new financial year, it’s the perfect time to prepare for new business prospects and opportunities.

Here are a few recommendations for taking a few steps to get your business ready for the year ahead.

1. Review your finances: Take a look at your income and expenses from the previous year to get an understanding of your financial situation. This will help you plan for the upcoming year and identify areas where you can save money.
   
2. Set financial goals: Determine what you want to achieve financially in the coming year.
3. Create a budget: Based on your business’s financial goals, create a budget for the coming year. This will help you track your income and expenses and ensure you’re staying on track with your financial goals.
4. Review your tax obligations: Check with your trusted advisor CRS Group to ensure you understand any changes in tax laws and regulations that may affect your business or personal taxes.
5. Review your insurance coverage: Review your insurance policies, to make sure you have adequate coverage for your business needs.
6. Review your investments: Review your investment portfolio to ensure it aligns with your financial goals and risk tolerance.
7. Plan for emergencies: Make sure you have an emergency fund in place to cover unexpected expenses.

By taking these steps, you can help ensure you’re financially prepared for the new year and set your business up for success.

View the TAX GUIDE from SARS.

Did you know, there are several tax incentives available for businesses that invest in solar energy? These incentives include:

1. Accelerated depreciation allowance: Businesses can claim an accelerated depreciation allowance for qualifying renewable energy assets, including solar systems. This allows businesses to reduce their taxable income and save money on taxes.
2. VAT exemptions: Businesses that invest in renewable energy sources, including solar systems, are exempt from paying value-added tax (VAT) on certain equipment and services related to the installation of the system.
3. Net metering: Businesses can sell any excess electricity generated by their solar system back to the grid, allowing them to offset their electricity costs and potentially earn additional revenue.
   
4. Municipal rebates and grants: Many municipalities offer rebates and grants for businesses that invest in renewable energy sources, including solar systems. These incentives can help offset the initial investment costs and make solar more affordable for businesses.

By taking advantage of these solar tax incentives, businesses can reduce their overall energy costs, save money on taxes, and demonstrate their commitment to sustainability and environmental responsibility.

• A tax rebate to individuals for solar PV panels of 25% of the cost for a limited period, subject to certain conditions, and capped at R15 000 per individual.
• An expanded tax incentive for businesses of 125% of the cost of renewable energy assets used for electricity generation, brought into use during a period of 2 years from 1 March 2023.
• Granting tax relief by adjusting personal income tax brackets and rebates for the effect of inflation.
• Adjustments to tax tables for transfer duty, retirement fund lump sum benefits, and retirement fund lump sum withdrawal benefits, to take into account for the effect of inflation. 
• As in the 2022 Budget, government again proposes no changes to the general fuel levy or the Road Accident Fund levy.
• To limit the impact of the energy crisis on food prices, the diesel fuel levy refund will be extended to manufacturers of foodstuffs for a period of 2 years, from 1 April 2023 until 31 March 2025. 

View the TAX GUIDE from SARS.