Earlier this year, Sri Lanka introduced tax reforms and raised taxes to revive its economy, after the country faced economic challenges a year ago. Meanwhile, a combination of factors, including the Covid-19 pandemic and high inflation, have slowed growth and reduced profit for many enterprises.
While small businesses in all sectors are affected, manufacturing and construction sectors have suffered the most amid shortages of inputs and supply chain disruptions. As many countries in South Asia experience similar challenges, accounting professionals are playing a vital role in supporting SMEs to keep afloat.
‘If you are running on borrowed capital, the risk is very high in crisis situations’
Assess expenditure
It’s important to maintain the current profit level to become sustainable, says Chelliah Mahendra, a retired chartered accountant who now works as a freelance finance consultant for SMEs.
The structure of the company’s capital becomes vital in times of crisis, he says. Depending on the capital and ownership, SMEs can take different steps to manage their profitability.
‘If you are running on borrowed capital, the risk is very high in crisis situations because loan interest is also high, so most of the profit gets driven away,’ he explains. ‘Businesses have to look into reducing their loan capital.’
SMEs can try to negotiate with banks, to either defer or restructure loan repayments until the economic situation improves. ‘Otherwise, both loan interest and high taxation affect your cashflow, so you have to effectively manage these areas to be in business,’ he says, adding that disposing of other fixed assets will help to replace loan capital and reduce interest costs.
‘Tax professionals can mediate between the bank and the business’
This is where accountants come in, Mahendra says, by identifying realistic ways to manage expenses. ‘You can postpone capital expenditure by avoiding things like refurbishing your office building,’ he says. ‘Small businesses should instead look into ways to improve turnover so they can counter high rates of taxation.’
Meanwhile, in Pakistan, business analyst Tayyaba Tauqir agrees that reducing cash leakages is key for small businesses to survive. ‘Businesses need to control day-to-day, unnecessary yet expensive routines,’ she says, adding that automating approvals also helps small businesses to avoid any expenses that contradict company policies.
Mediation role
Small business owners usually don’t know the ins and outs of the tax system in a changing economy, says Shehan Fernando FCCA, senior lecturer at Alpha Business School in Colombo.
Fernando points out that SMEs often face financial problems but do not have access to banks and other financial institutes. ‘Tax professionals can mediate between the bank and the business, and help them with arranging collateral and paperwork, and borrowing at a lower cost,’ he says.
Helping SMEs register with various government organisations designed to assist smaller enterprises, as well as advising on how relocation might bring tax and employee costs benefits, can also support business owners looking to trim expenses, says Fernando.
‘Try to hold onto what you have while cutting down on costs without affecting quality’
Staying on top of lending is vital for small businesses to survive. ‘People who buy on credit may delay payment or may not pay at all, so small businesses have to exercise care on lending or selling on credit,’ Mahendra says.
Efficient process
Tauqir notes that technology can streamline tax-related processes and make compliance easier. ‘Automation can avoid loopholes in manual operations and also reduce tax evasion, while easy access to digitised, smart whistleblowing channels can enable the public to report evaders,’ she explains, adding that accounting professionals play a key role in educating small businesses about their tax responsibilities, encouraging them to improve their understanding through attending seminars and other education initiatives.
Advising SMEs to regularly conduct SWOT (strengths, weaknesses, opportunities and threats) analysis is also essential to ensure that they are prepared for various threats that emerge in uncertain economic environments, Tauqir adds.
‘In a crisis, it’s difficult to grow markets, but you can try to hold onto what you have’
While small businesses should concentrate on reducing costs, Tauqir says that they can still foster a supportive and thriving working environment for their employees. ‘Small organisations can implement low-cost but fun motivational activities for their employees,’ she says, pointing out that she has has encouraged the start-ups she advises to drop expensive team dinners in favour of in-house parties and quizzes. This helps avoid additional expenses while still promoting a healthy working environment.
Cost-cutting measures should also extend to marketing budgets, Fernando says. ‘If you are advertising on television or in newspapers to reach your customers, you can temporarily stop that, and transfer to digital advertising modes on social media. It’s cost-effective and would help reach a similar audience.’
He adds: ‘In a crisis, it’s difficult to grow markets, but you can try to hold onto what you have while cutting down on costs without affecting quality.’
More information
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