Optimising financial expenditure in SMEs
Financial expenditure is an essential component of all businesses. It is also very costly. Taxation, insurance and banking costs form a major part of this. While unavoidable, these should not begrudgingly be accepted as rigid costs. Rather, this expenditure should be optimised: ensure that what you pay aligns with the requirements of your business.
No business wants to fall foul of the law, but tax reduction and evasion are very different things. There are many perfectly reasonable – and legal – ways to save on your taxes.
- Deductible business expenses
Deductibles are costs – in this case those needed to make an income – that are subtracted from how much tax you pay. These include inventory, a wide variety of equipment and the depreciation and depletion thereof; travel expenses such as fuel, public transport or flights; education costs associated with business skill development; and even entertaining clients.
- Record keeping
In order to claim such deductibles, careful recording is essential. In addition to your permanent book of accounts, supporting evidence such as receipts must be kept – so it is advisable to store these safely and in an orderly fashion.
Donations to a public benefit organisation are also deductible. Not only does this save money, but it doubles as a fantastic means of marketing and improving employee morale by demonstrating your values to staff and potential clients.
- Individual deductions
You can also reduce what you withdraw from your business by saving on your individual income tax. You can contribute up to 15% of your income to a retirement annuity as a tax deductible, as well as claim for contributions to medical aid.
Given that lack of sufficient insurance can be the end of an SME, high expenditure on it is justified. However, there are numerous ways to reduce your premiums without putting your business at risk.
- Compare quotes
Companies use different algorithms to evaluate risk – so the same information can lead to widely varying costs for the same coverage. It is best to get quotes from several different insurers before making a decision.
- Avoid over-insurance
Insurance plans may cover risks that are not relevant to all businesses, so always check what you’re paying for. Commercial auto insurance is clearly unnecessary for a business without vehicles, for example. Compensation coverage rates can vary drastically between job types, so ensure your workers’ classification aligns with their risk.
- Risk reduction
Of course, it’s best if you prevent loss or damage in the first place. Installing safety features such as fire alarms, buffing security, and certain employee training such as defensive driving can all lower premiums. Plus, many insurance companies offer discounts based on periods without a claim.
While a backbone of modern business, banking can be complex. What should you consider when choosing a bank and managing your finances?
- Focus on relevant costs
Before anything else, you should check the fee schedule for a bank, and types of bundles offered. Evaluate what is included in different bundled services (for example, the number of free transactions), the costs outside of the bundle, and then compare it to your typical transactions and financing needs.
While having multiple bank accounts is useful in some contexts – for example, having separate work and personal accounts for tax return purposes – in many cases it is wasteful.
- Stay in the black
Whenever you accrue costs that exceed your existing capital, it comes at a significant price. You incur a penalty fee if your account is charged when you have insufficient funds. If you have overdraft or credit card facilities, you pay high interest rates when in the red. If you take out a loan to pay for an asset – such as a car or property – the interest is generally lower. In this case, the risk is that the asset is used as collateral and can be repossessed if you fail to make repayments.
Reduce financial costs with a healthy cashflow
Despite the costs – and risks – associated with taking on regular debt, many SMEs don’t see another option. While their clients require credit terms of up to 120 days, they need to cover business expenses in the interim.
Merchant Factors offers an attractive alternative: a financing method called factoring. You sell your accounts receivable to this third-party organisation, getting cash up-front. This alleviates cashflow struggles, and therefore the costs of debt. With additional working capital, you can also invest in risk reduction upgrades for your business and maximising your tax deductibles – empowering optimised financial expenditure.
For fast, flexible business finance – contact Merchant Factors today
Finance beyond the Numbers.