WHY IGNORING GOOD GOVERNANCE IS DETRIMENTAL FOR SMMEs

Good governance is about having a system of policies and processes put in place in a business. This is done in order to ensure accuracy, consistency and responsiveness to key stakeholders such as customers, shareholders, investors, funders, and regulators. Now more than ever, we have seen the importance of SMMEs to have their affairs in order. COVID-19 resulted in a variety of business relief packages being launched by the government and financial institutions in order to help businesses in distress. It has, however, been very disappointing to learn that majority of applications to these interventions have been rejected. Major reason sighted for most of the rejections is poor business governance amongst which is lack of proper documentation, poor financial management, non-compliance with regulations as set out by SARS, CIPC, and the Department of Labour.

Every structure needs to have some sort of guidance and leadership, be it a family or a social club. It’s the same with a business, except this guidance and leadership is more comprehensive and it is regulated. In large corporates, the board of directors is tasked with the responsibility of good corporate governance and this is governed by the King IV Report for Corporate Governance. This, however, does not mean that governance is not applicable to smaller businesses. Governance is applicable to businesses of all shapes and sizes, be they small, large, public, private, registered, or not registered. SMMEs who want to get serious about their business need to embrace good governance.

COVID -19 acted as an excellent reminder to all businesses about good governance.  Now is a good time for SMME entrepreneurs, owner-managers, and managing directors to sit back and reflect on the lessons learned about governance during this period. The best start is to look at areas that form part of the funding eligibility criteria as set out by the relief funds. Businesses must assess what they would or would not be able to provide in respect of the information or documentation required for a successful application. This will give a good idea of where the business is and which areas it needs to focus on when it comes to governance. The key areas of governance that businesses should keep a close eye on are summarised below.

Structure and Documentation

Most businesses are registered as companies. It is, therefore, important that registration information is kept on hand, but even more important is to file annual returns with CIPC to keep the business registered. Shareholding information such as share certificates, a share register, and a Shareholders Agreement must be prepared and kept safe. BEE certificates must be kept up to date. Where a BEE audit is required, it must be performed timeously before the expiration of the current certificate. Identity documents of shareholders and directors must be readily available.

Where directors or owners of the business do not manage the business, authorised signatories must be appointed. These are individuals who have been authorised to sign agreements that are binding on behalf of the company.

TIP: Always keep a specimen signature of signatories on a secured folder. This will save time when a signatory is not physically available to sign. Remember to get written permission prior to using the signature.

Tax Considerations

Tax compliance is complex as there are many areas to consider. There’s

•       Income Tax (which also includes Capital Gains Tax and other withholding tax within)
•       Value Added Tax (VAT)
•       Pay As You Earn (PAYE) for your staff

All these areas require different tax submission returns to SARS at different deadlines which could be monthly, bi-monthly, annually or bi-annually. If at any point the business is not compliant with any of the taxes, then SARS will flag the business as non-compliant. This means that any stakeholder with access to a clearance pin will see that the business is not compliant.

A business that cannot keep its tax affairs in order cannot be trusted. Simply put, no one will want to do business or offer funding to a business that is not tax compliant.

Staff Considerations

If the business employs staff, then SMMEs must familiarise themselves with the regulations of employers as set out by the Department of Labour. As we have seen recently, most businesses could not access relief funding offered by the Unemployment Insurance Fund (UIF) due to non-compliance. Employees were not registered for UIF, and the businesses were also not contributing their portion to the fund either. Good governance includes proper human resource policies and procedures, no matter the size of the business.

Financial Management

Businesses are required to have a financial management system in place. This will ensure that there are proper financial records available at all times. A proper financial system will also give credibility to stakeholders on the business’ finances. Businesses who leverage off technology and have good accountants find this area of governance less challenging.

TIP 1: Funders work with real-time information. They will always scrutinise a business’ bank statements. As a business owner, you must always keep your cash handling affairs in order. Make sure that the bank statement does not reflect a high number of overdrawn accounts, returned debit orders, arrears, large entertainment bills, etc.

TIP 2: Financial management conduct of directors can affect the business directly. If directors have poor financial records and judgments against their names, then the business will struggle to raise funding.

SMMEs should not ignore good governance practices. Without good governance measures in place, it would be near impossible for a business to grow, let alone attract the confidence of investors or funders. Governance is not complicated. It merely requires a business to have trusted advisors (your accountants) and some form of administrative support as a start. As the business grows, this could be stepped up to include a couple of non-executive directors or even an advisory board.

The Accounting Village has a team of experienced professionals ready to assist your business with good governance practices.  Get in contact with us here to start your journey towards peace of mind.