5 Key Considerations in Accounting for Filipino SMEs

5 Key Considerations in Accounting for Filipino SMEs

Finance & Accounting

CloudCfo Inc

CloudCfo Inc

6 Jul 2021, 13:42 — 15 min read

SME businesses are commonly considered to be the engine of the Philippine economy! 

 

Over 99% of registered businesses in the Philippines are small and medium sized businesses, employing over 60% of the working population.

 

Many small business owners have, unfortunately, had to cease or suspend business operations as a result of the COVID-19 pandemic. However, in the past year, many have also moved forward to starting and building their own small business across a wide range of industries in the Philippines.

 

In this article, we outline 5 key items that small business owners must consider from the perspective of accounting, particularly if their objective is to grow their business in the future!

 

1. Business Registration

 In short, if you are running a business in the Philippines for a commercial purpose, you should be registering your business with the government and the Bureau of Internal Revenue, the BIR

 

Depending on the type of business you register, your obligations from the perspective of tax compliance, corporate compliance and financial reporting will be different. This will have a direct impact on the accounts and finances of your business on a day to day business. 

 

The type of legal entity that you decide to register will generally dictate the specific government agencies with which you will have to register the business. 

 

For example, if you are setting up a standard domestic corporation or a One Person Corporation (OPC) in the Philippines, you will need to register it with the Securities Exchange Commission or SEC, the BIR and the Local Government Units (LGUs) (as well as a number of other agencies). 

 

If you wish to register as a Sole Proprietorship, you will need to register with the Department of Trade and Industry, the DTI, the BIR and the various LGUs also. 

 

When making this decision, remember that your small business might not always be a small business! So, before moving forward to register your business, prepare a business plan and identify what your plans and objectives are for the business – in one year, three years, five years or maybe longer – down the line. This will help you to understand which type of registration would be most appropriate for your business.  

 

For example, if you intend to take on investors shortly after you start the business, registering the business as a standard domestic corporation is likely to be the most suitable set-up as this type of entity allows for multiple investors and shareholders. 

 

So make sure to consult your lawyer or your business registration service provider about your business objectives before moving forward to register your business in the Philippines. The type of business that you decide to register for your small business will have

ongoing implications for the accounting and finance function of your business! 

 

2. Understanding your Business Model 

 To give your small business the best chance of sustainability and success, it is crucial for founders and owners to fully understand their specific business model and the implications of that business model for the accounts and finances of the company.

What do we mean by “understanding your business model”? 

 

You first need to identify how your business will generate money. Will you sell goods? Will you sell services? Will you sell both? Will you sell to businesses only (B2B)? Or will you sell to individuals (B2C)? Will you service international customers only or will your focus be on the domestic Philippine market? 

 

How will your customers pay? Will it be through bank transfers? COD? Will you offer the use of payment platforms or payment gateways? 

 

Remember – payment gateways and credit card companies charge fees for using their facilities – so this will also have to be factored into your pricing and considered from the perspective of accounting. Will the business assume the charges or will it be passed on to customers? This decision could result in a higher or lower price on the goods or services you are selling – and consequently, the value of revenue or sales that you expect to generate! 

 

What about payments and expenses? Will you hire employees or will you engage contractors? Will you use outsourced services for marketing, accounting or technology? Or will you keep everything in-house? Perhaps a hybrid model in which you will only keep core competencies in-house and outsource the rest? 

 

Remember – in the Philippines, there are different types of taxes and compliance requirements applicable depending on if you are paying employees, contractors, suppliers, freelancers, etc. 

 

The key point to consider here is that however you set up your business model, there will be a direct impact on the accounts and finances of the company. Take payment terms as an example. If you sell goods to other businesses (i.e. B2B), you may not get paid for these goods immediately. B2B customers may demand payment terms of 30 or 60 days or more(!) depending on the industry. This means that your business could have a period of time during which it is not actually receiving any payment, despite the goods having been sold already. 

 

Alternatively, if you sell goods to individual customers (B2C), for example, through an e-commerce business model, you will generally be paid either prior to or upon delivery. On the flip-side, however, the value of each sale transaction is likely to be much lower in B2C than B2B.

  

For a small business starting out, identifying and understanding the impact of your business model on your finances is critical to the future success of the business.

 

3. Setting up your Accounting Processes and Controls

 Many owners or managers of small businesses opt to concentrate on getting their product or service to market, start generating revenue and building a client base, before they start focusing properly on the accounting and finance side of the business. 

 

This approach can result in a lot of catch-up work later down the line, particularly if tax compliance has not been managed or monitored closely in the early stages. In the Philippines, this is of particular importance as tax filings for many businesses are required quarterly, monthly and annually, and for some businesses – bi-annually also.

 

What kind of financial processes and controls need to be considered by small businesses? Below are just a few examples. However, the business model (see above) will generally dictate more specific processes and controls that might be required.

 

  • Revenue Side: What are your customer payment terms? How often will you issue payment reminders to customers? Who will issue those reminders? How regularly will you review and reconcile sales reports against cash received? How will refunds, returns or discounts be managed and applied? How will they be identified and recorded in the company accounts?
  • Expense Side: Will you pay via bank transfer? Or cheque? Does your current banking provider enable efficient bank payments? How will withholding tax be managed? Who will coordinate the Withholding Tax Certificate (BIR2307)? How will you record and monitor outstanding payments to suppliers? What about liquidation reports? Who will be in charge of petty cash?
  • Financial Reporting: How often do you want to see your financial reports? Who is going to prepare these reports? Will you generate the reports using an accounting system or manually? What analysis or KPIs do you want to review within the reports? 
  • Payroll: How will payroll be disbursed? How many payroll runs will you do each month? What date are your payroll cut-offs? Will you use a payroll system? Who will file the Withholding Tax on Compensation each month? 

 

As mentioned above, your small business may not always be a small business! The business may start as a hobby or even a test or research project to understand if your service or product can be a viable business within a chosen market.

 

The owner or founder may then realise that, actually, there is a niche in the market for the goods or services that the business is selling and decide to focus on growth.

 

If the business grows, it is absolutely critical that you not only have robust financial processes and controls in place – but that those processes and controls are fully scalable and grow with the business as the commercial side of the business grows! 

 

4. Understanding your Tax and Compliance Requirements

 Tax compliance is a key element of the accounting function for all businesses – not just small businesses. 

 

However, small businesses may not always be fully aware of their tax obligations from the outset. Why? If the business is just starting out, they may not have access to, or the financial resources for, an expert accounting or tax adviser. Also, as mentioned above, founders and owners may not put as much focus on tax and compliance as they concentrate more on their entry to the market and scaling the commercial side of the business. 

 

However, from an accounting perspective, it is crucial that small businesses consider their tax and compliance obligations in the same way that a large corporate or multinational would and ensure 100% compliance with SEC and BIR requirements. 

 

For example, if the small business is in the business of selling products, it needs to be issuing a physical sales invoice with the products for every sales transaction. Yes – this applies for e-commerce businesses also! 

 

If a small business is selling services, let’s use digital marketing services as an example, the business should be issuing official receipts for every payment received for the services provided.

 

Why are the sales invoices and receipts important from an accounting perspective? These documents are the underlying evidence that supports the entry of transactions in the accounts and books of the company. They are also relevant when computing taxes on both the revenue and expense side of the business. 

 

Small businesses should move away from any view that they are only small businesses and as such, don’t have to be overly concerned with accounting or tax compliance. Whether it is the BIR, a potential investor or an existing shareholder, there always exists the possibility that a third party will ask to review your finances and tax compliance activities – so make sure this is being monitored and managed.

 

5. Generating and Understanding Financial Reports 

No matter how big or small your business is, you need to understand if it is performing and has enough cash to survive. If you are in charge of running a small business, you need to know if you are able to pay your staff each week, if you can pay for electricity to keep the lights on, if you can pay your suppliers to ensure that you actually have goods or services to sell! 

 

Many small businesses will just look at their finances on the basis of what cash is coming in and what cash is going out on a daily or weekly basis. This can, however, result in issues as it will not take into account many other key financial elements of the business. For example, this day-to-day cash monitoring approach will not consider:

 

  • Outstanding debts or payments due to suppliers. You might receive lots of cash from customers one week, yet, you might have a large bill to pay suppliers next week which you might not have budgeted for! 
  • The value of your assets. This will help you to understand the true value of your business. 
  • Loans or interest that might be falling due. You don’t want to be caught out on penalties for missed interest payments. 
  • Product returns or customer discount requests. During the community quarantine in the Philippines, many small businesses were hit financially with requests for discounts which would not have been budgeted for. 

So, what is the solution? We recommend that small businesses should be generating/requesting and reviewing a full suite of financial reports including a cash flow statement, income statement, profit and loss statement and a balance sheet. 

 

Small businesses can adopt the processes of larger businesses and corporations which can really give small businesses an edge from a financial analysis perspective. 

 

Only by receiving the full suite of financial reports, will you as a small business owner, be able to understand the true financial status of your business. This also enables you to make important commercial decisions about your business knowing that the decision is

supported by accurate financial intelligence. 

 

CloudCfo – Expert Accounting Services for Small Businesses in the Philippines

 The CloudCfo Team has supported many startups and small businesses around the Philippines with process-driven accounting services. We help companies to set up their financial processes and controls, enabling small business owners to receive detailed financial information about the true health of their business.  

If you are just starting out or if you are already running a small business here in the Philippines and you are seeking a cloud-based, process driven accounting service to ensure your accounting function is running as efficiently as possible, Contact our Team today and let’s discuss!

 

Also Read: Venture Capital Financing: Considerations for Filipino SMEs

 

Image source: Shutterstock

 

DISCLAIMER: This article is strictly for general information purposes only. Nothing in this article constitutes or intends to constitute financial, accounting, regulatory or legal advice and must not be used as a substitute for professional advice. It is still necessary to consult your relevant professional adviser regarding any specific matter referenced above. The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.

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