5 Common Tax Mistakes SMEs Make in Africa
What are the common tax mistakes that SMEs make in Africa? Read this post to find out so you can avoid the same mistakes.
You’ve probably heard the infamous quote that about 80% of SMEs today fail within their first 18 months of establishment. By any standard, these numbers are very shocking and tragic, but unfortunately, this is the reality. Since most SME founders contribute to this high failure rate in one way or the other, they essentially are committing suicide without realizing it.
Don’t get me wrong; there are many reasons why a firm might collapse. Many of these factors are internal (like the efficiency of operations), but some of them are external (like a poor economy or high insecurity). Unfortunately, one of the primary internal causes of business failure is subpar financial management.
Common Tax Mistakes SMEs Make in Africa
The truth is that about 80% of the time, SME owners (especially in Africa) form terrible habits and make poor choices that guarantee the failure of their enterprises. When it comes to tax remittances, there are several such errors, but we will discuss just five of the common tax mistakes in this article. Even if your firm is modest, you may already be in violation of a couple of these without knowing it. Let us shed more light on these errors and how to prevent them below:
Failure to Meet Deadlines
Even if it sounds dull, this one is the most common tax mistake an entrepreneur can make. Yes, you must not miss any tax-related deadlines. The sheer volume of forms and schedules required for your firm is what makes it challenging.
The deadlines for filing yearly federal income tax returns are something that both businesses and individuals should be aware of. You can set reminders for crucial filing dates to avoid any delays or last-minute modifications to the deadlines. Missed deadlines could result in severe fines and lost waivers. That’s why it’s important for your business to strictly adhere to the schedules and file all necessary papers and schedules.
Failure to maintain accurate financial records
Financial records or statements serve as a thermometer for your company. They offer significant and priceless information that serves as an early warning system to let you know when something is amiss. Businesses typically fail without these warning signs because it makes the symptoms harder to spot.
Accountability is a crucial component of any business’ success (big or small). When there are no records to back it up, how can you be held accountable? If a company lacks the discipline to maintain records, how can it possibly succeed? Without writing down or keeping track of your incomes and costs, how can you tell if you’re making profits or losses? You can only keep so much information in your head. But you can easily refresh your mind with your jottings in a small notebook, a computer file, or a business management program.
Maintaining thorough and current records of your company’s financial transactions serves more than simply your own benefit. In the event that you need financing from banks and investors, you would first need to demonstrate that your company is successful and able to recoup the interest and returns.
Confusion between revenue and profits
Understanding how these two words vary is crucial for business owners. The money that enters your business as a result of people purchasing your goods or services is known as revenue, sometimes known as sales or turnover. Profit is the difference between the money coming into your business (revenue) and the money leaving it (expenditures) (costs).
The fate of numerous small firms is the same. Even though their stores are constantly crowded with consumers, and a lot of money is being spent there, they are not making a profit. One of the main causes of a company having large sales or revenue but little or no profit is typically excessive costs. Regardless of how much sales or revenue your company generates, if your costs are too high, you run the risk of going out of business.
Your company would, for instance, likely go out of business if you hired more people than you needed (which would result in huge pay expenditures) or obtained a bank loan with a high and unfavorable interest rate. Even if it appears healthy on the outside, the company would actually be terribly ill within. It will eventually fail; it is simply a matter of time.
Reporting Income Incorrectly or Excessively
This is one of the most serious common tax mistakes to avoid. Due to a lack of accounting understanding, many SMEs have a tendency to either underreport or overreport their business income. For instance, when a client receives a sales tax invoice, the tax portion is often not included in the income. Taxes are not included in the income but are presented on the balance sheet under various headers. Making this type of mistake will result in higher income taxes for the organization.
The businesses must also declare all of their earnings for the fiscal year. There may have been invoices sent to clients that have not been paid, for instance. However, it is treated as income if you are utilizing the accrual method of accounting. Additionally, taxes must be paid on it by you. SMEs should therefore be very careful because under- or over-reporting income might have tax repercussions.
Using no automation
Due to the intense competition on a worldwide scale, SMEs these days really afford to devote too much of their time to compliance and regulatory matters. The greatest solution for dealing with financial reporting compliances is to use automation and online accounting. Management of returns electronically, tax reporting, structuring, and bookkeeping can be easily automated.
The organization’s data and records are organized through the use of automation. Entrepreneurs can use accounting automation to save time by not having to work as many hours as accounting clerks.
Conclusion
Tax errors affect SMEs’ growth and sustainability much more than most business owners realize. Best practices, diligence, and tax structuring can maintain a company financially sound. However, small errors can cost businesses money in the form of penalties, overpaid taxes, and many hours spent with auditors.
Due to the always-changing rules, learning taxes is becoming more difficult, but knowing what not to do is simpler. The list above should have provided you with some new information. We sincerely hope that you apply the lessons to your company in order to keep it viable.
Kindly check SME360 to read articles that will help you run your business better.
