More often than not, the true cost of time, that is, the hourly rate of each person working on a project has never been accurately calculated and therefore not factored correctly into the quotation price, including overheads that are paid annually and profit. Owners forget that they too are selling time in managing the project, but more often than not, include the cost of their time as part of the profit.
Many business owners do not realise that part of what they do is sell time and they do not consider calculating how much their hourly rates and those of their employees are. For example, take a small artisan ice-cream producer who has two employees who mix the ice-cream ingredients and place the mixture into ice-cream machines all day, while the owner spends half of every day supervising this process.
The employees are selling time and the owner is selling a half day of her time every day. They are not just selling ice-cream. These costs should be factored into each ice-cream tub’s selling price.
In simple terms, hourly rates are calculated using the employees’ annual remuneration package, including benefits such as medical aid, provident fund contributions and travelling allowances, company contributions to statutory obligations and overheads plus profit divided by the average labour capacity in a year.
To simplify this, here is the equation:
Annual Remuneration + Benefits
+ Company Contributions
+ Annual Company Overheads + Profit
If the owner of the business is providing the service personally, the remuneration should be market related and relevant to the years of their experience as well as the skill level and risk attached to the actual service being provided. For example, in the medical profession a cardiac surgeon provides more complex services and carries more risk in his work than a general practitioner and would therefore have good reason to demand a higher fee or hourly rate.
Depending on the industry, some element of an employee’s day will be unproductive as it is unreasonable for any person to be productive for a full eight hours, particularly in a high-skilled industry.
That leaves just 14 working days a month when averaged over a year. That’s right, less than three weeks a month.
Make sure that you recalculate your hourly rate and that of your employees each time there is a change in remuneration or benefits. The remuneration paid to employees who do not directly generate income, such as receptionists, administrators and sales personnel should be included under overheads.
If the hourly rate costing is correct, each employee’s true productivity can now easily be measured against the income they directly produce or have contributed when compared to their remuneration package. This provides useful information when conducting employee appraisals and addressing pay rises.
Related: How to Get the Better of Debt
If your business is selling a service or any part of a service, when last did you ask your accountant to assist you in checking your hourly rate and that of your employees?
Technology In Accounting – Race For Relevance
Change is not just coming, it’s already here and the rate of change is growing exponentially.
Change is not just coming, it’s already here and the rate of change is growing exponentially. The recent research from ACCA around the race for relevance talks of six key technologies (Analytics, Artificial intelligence, Cloud computing, Cyber, Social and Robotic process automation), likely to present opportunities that challenge our traditional ways of working to all businesses, including SMEs – as well as their finance function.
The report explains that whatever the size of the business, technology change is having an impact.
It is imperative for SMEs to understand these technologies and start to, at least, plan. Failure to capture opportunities runs the risk of businesses being marginalised.
Technological advances provide finance functions with significant opportunities to play a valued role in maximising the organisation’s strategic ambitions and in how it is evolving. Not of all the key technologies may be relevant to all immediately, however, understanding which of them apply and can deliver value, is important.
In this corporate race for future relevance, recognising the opportunity is essential. Organisations are in a race to remain relevant to their customers and communities. Adapting and embracing technological changes in business is critical. Companies who leverage new technology well are going to win big in business. If CFO’s are to remain in decision making roles the need to understand the importance of data analytics is crucial. Businesses need forward thinking CFO’s who:
- understand how to use the information available to them to provide strategic insight in real time;
- capture, measure, report and predict future performance in a much more agile manner to support better and quicker decision making;
- ensure they have in place effective and efficient processes that satisfy the overall business requirements of finance.
This is not to say that there is one approach. No single model fits all finance teams but there is an overall direction of travel. However, its not enough to become more efficient, but finance function must assist businesses to make decisions based on the right data. To achieve the goal of transforming the finance function, the CFO needs an understanding of the emerging technologies and the opportunities available. The CFO must ensure that there is sufficient governance of the data sources, be these internal or externally generated, to provide insights based upon ‘one version of the truth’.
In realising the finance technology strategy, it should be remembered that this is often a partnership between the Information Technology (IT) team and the finance function. As business partnering has affected the relationship between finance and its customers so the same process can be replicated in the relationship between finance and IT.
By 2020, organisations are expected to gain $1.2 trillion in business from their slower-to-adapt peers. How do you, as the accounting professional, influence this today? How do you work with IT to thrive in this age of change?
Can Computers Replace Human Accountants? We Doubt They Can
People remain paramount to the accountancy profession despite advanced modern technology and artificial intelligence. But accountancy is no longer just about financial statements and tax returns.
“The secret lies in embracing the technological advances without sacrificing the values and ethics that sustains and defines the profession,” says Jeanne Viljoen, Project Director: Practices at the South African Institute of Chartered Accountants (SAICA).
“Don’t fear technology – embrace it and use it wisely. By embracing technology, the profession can provide deeper insight to their clients while helping them understand the rapidly approaching ‘new normal’ for business operations.”
The radical transformation of accounting
“It is no secret that accounting has been radically transformed by globalisation, digitisation and a growing amount of technological integration into business operations.
External disruptors, like the use of big data, the cloud and distributed ledger technology also affects the profession, but computers will never replace human interaction or advice.
Computers and algorithms may increase accuracy and can crunch numbers and vast amounts of information at increasing speed, but they have no feelings and cannot learn common sense or the ability to plan creatively. They also cannot deploy human judgement or professional scepticism,” Viljoen continues.
This, paired with a human accountant’s technical knowledge and adherence to a global Code of Ethics and international standards applicable to certain types of engagement, offers vast new potential for accountants to accurately interpret data and develop insights that will underpin more valuable strategic recommendations for their clients.
The focus of accounting is changing
“While traditional services will continue to remain an important part of what accountants do, the focus will be different. The biggest benefit of using artificial intelligence (AI) instead of manual bookkeeping, is probably the time it frees up for accountants to provide strategic advice to businesses and organisations.
Real-time accounting can help small to medium businesses to take decisions when needed instead of waiting for months for financial statements.”
Correct analysis of business data is exactly what gives a business a competitive edge and help generate a higher profit margin.
“If, for instance, your company sell products online, software that enables you to determine when your customers are most active online will help you determine the best time to market to them. The correct technological systems and software can make your business lean and mean and will enable a total overview of your business at the press of a button.”
This can prevent relatively small problems like absenteeism on certain days and over claiming on business trips to turn into big crisis situations.
“This is exactly where accountants will continue to play an important advisory role, because they are trained to analyse risks, and spot outliers, exceptions and trends.”
Accountants can also assist businesses and organisations with cyber security and successfully navigating their digital landscape, helping to avoid cyber fraud and the theft of personal information.
The future of accounting
Viljoen also referred to twelve predictions about the future of the accountancy profession made by Rob Nixon, an internationally renowned accountancy expert. These are:
- Compliance will be completely commoditised, meaning less “human” time spent on ensuring compliance.
- Cloud accounting will be installed in more than 90% of small- and medium-sized entities, because more and more people want their data and information on their mobile devices.
- More than 90% of accounting firms will have cloud practice management, as it improves efficiency and mobility and lowers operating costs.
- Coaches and consultants – even non-financial – will become competition for tomorrow’s accountant.
- Clients will be more transient because of cloud accounting. All that is required for data to be captured is a login code. This will result in tighter and more enduring relationships between client and accountant.
- Offshore teams will be more prevalent – cloud computing will enable your teams to work anywhere.
- Compliance prices will plummet, new systems costs will be reduced and financial reporting will be current.
- Marketing and sales skills will be needed – with commoditised services comes price pressure and new low-cost entrants into your market. Accountants will need to differentiate and give compelling reasons as to why clients should stay with them.
- Young people will not buy into staid and boring systems – they are not interested in old-fashioned systems/equipment and offices. Instead, they will be tech-savvy and will want progress faster than ever before.
- There will be no more time-based billing, but rather a valuation of the intellect that has taken many years to develop.
- The role of business advisor will result in more than 80% of an accountant’s revenue, as accountants can add a huge amount of value when they know the facts. Spending less time on compliance services will mean that an accountant will have more time to truly live up to the trusted advisor status that they deserve.
- Advanced technology will mean that clients are finally served properly with real-time data, resulting in the accountant adding real value to the business.
In the light of all of this, it is important for small to medium businesses to look critically at their digital strategy, she concludes. “You don’t need to buy the biggest, most expensive accountancy system. Look at your cash flow and needs and invest in a system that can grow with your business. Your accountant will be the best person to advise you on this.”
Save Your SME Money With A Good Payroll Management System
Not only does an efficient payroll system enhance staff morale and boosts your reputation, it can also save your business significant costs.
Payroll solutions are designed to help hone the strategic focus of your business’ HR department, by shifting HR and payroll managers’ from paperwork to developing and motivating employees.
“The biggest potential saving comes from full compliance with tax and labour laws and regulations,” says Ania Strydom, Compliance Specialist at Sage. “Avoiding the massive costs of fines, interest and penalties that a company risks if it doesn’t comply.”
Here are her tips for conducting payroll, saving money on a good system, and pitfalls to avoid that most SMEs don’t see coming:
Choosing a viable payroll management solution
- Look for a scalable product that can grow alongside the business
- Find a solution with full local support that is kept up to date with relevant labour and tax laws for the markets where the business operates
- Make sure the vendor has a proven track record and local reference sites
- Ensure that the solution is built on flexible modern technology that accommodates today’s trends — mobility and the cloud, for example
- Consider a solution with integrated employee self-service functionality.
Vital considerations when conducting payroll
- Ensure that the payroll department consists of people with a good knowledge of payroll and the required skills set to ensure success and compliance with payroll
- Instil a payroll environment that does not need regular review
- Conduct regular payroll compliance audits to ensure compliance minimises the risk of exposure.
How a good payroll management system actually save you money
- Using automated payroll software with employee self-service functions can help organisations save time as it diminishes the need for manual data capture, calculations, reporting or returns
- Rest easy knowing that automation reduces the possibility of human error, allowing businesses to focus on strategy, customers, and employee engagement rather than on red tape
- Payroll can help businesses understand how employees are contributing to profitability, what resources are needed, the cost for major projects, and identifying gaps or surpluses in their human capacity
- The risks of payroll fraud and incorrect payments are reduced by giving managers better visibility into transactions, providing an audit trail, and providing a set of controls, checks and balances
- The biggest potential saving comes from full compliance with tax and labour laws and regulations – avoiding the massive costs of fines, interest and penalties that a company risks if it doesn’t comply.
Avoid payroll errors SMEs typically make
- The use of manual solutions due to tight budgets. They should instead, look at affordable, cloud-based solutions that are priced per payslip per month instead
- Failing to enforce separation of duties. Different people should have responsibility for capturing payroll data and for managing access to the system as well as adding and removing employees from the payroll. Another person checking that the numbers add up could reduce risks of fraud and error
- Not keeping abreast of changes to tax and labour laws such as the Employment Tax Incentive.
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