Why you need to formalise your business

Wednesday October 22 2014

cows business

In addtion to having a well organised farm like this one, being formally registered and tax compliant opens up more opportunities for business.  

By James Wire Lunghabo

While participating in a Small and Medium Enterprises (SMEs) exhibition, I took time to talk to other SME owners to find out how they run their ship. One thing that stood out was the fear most had about formalising their businesses and running them in a professional manner.

You may have begun that business as a result of serious interest, you have grown from nothing to something in a matter of months or years and the money is flowing in.

Caution on success
However, do you know how much you earn? Do you know your profitability? Do you know how you will move from your current level of operation to the next? Do you know your tax obligation?

A year ago, I met this young man who was by then employed by a leading fish processing company. He knew his turf too well to the extent that when he lost his job, he decided to start his own operation. I had a chance to talk to him as he kicked off his business and cautioned him on what to look out for if he is to manage the success, which I had no doubt he was going to achieve.

A few weeks back, while on my usual rounds of acquiring fish stock, I did chance upon someone who narrated to me the demise this young man had doing business. While he had made a lot of money in so short a while, he failed to manage it and is now back to square one looking around for a little money here and there for survival. The very things I cautioned him about eventually brought him down.

Limitations
As you read this, you probably are running a small agriculture-related enterprise (like most Ugandans do). It could be a chicken rearing business, trading in rice, Irish potatoes, vegetables among others. You prefer to run your operations the shop keeper way, that is, as an individual due to the fear of Uganda Revenue Authority and perhaps a mere lack of appreciation of the importance of registration.

Advertisement

While you may be content with operating below the radar, there are limitations you are creating for yourself. Patrick Bitature, one of Uganda’s leading entrepreneurs, once said that from the day he chose to cease informal approaches towards business, he has grown in leaps and bounds.

Diligence
“Without a formal business, you are like a formless structure that survives only by chance, many people want to live on chance and do things by chance, I believe when you do things the right way, you are not only credible but also stand as a pillar that many can look up to ...” stated a one Arthur Kmo online.
While the taxman may be the greatest fear for many SME business owners, upon enlightenment, these very people get to realise that actually the taxman can be a good ally if one formalises their operations and exercises due diligence.

Seeking help
I once told an entrepreneur who had started a winery in her home that the tax man only charges you based on your revenue or profit made. When she got to realise that corporate tax, for example, is only paid if one has made a profit, she sounded very surprised.

Getting registered as a business is no longer a demanding and intricate process like in days gone by. The Uganda Registration Services Bureau is awash with information on how you can do that and one has the option of getting initial information from their online portal which also avails downloadable forms.

Organisations like the Uganda Small Scale Industries Association do have services that they extend to their members like book keeping, skills transfer, among others, you may want to consider membership with them. Ignorance is no defence and a lack of knowledge will always stiffle your ability to progress. Its the time to act and get that ship of yours in order before its too late.

What you miss out on

• Access to support: There are opportunities for support through banks, micro-finance, NGOs and other government-related development programmes.
However, this can only be accessed when your operations are formalised. Take the case of the Youth Fund that requires registration and formal operations.

• Market access: As you venture out for significant market opportunities like supermarkets or export to neighboring countries, it is a pre-requisite to be a legally registered and tax compliant entity.
You may also fail to get barcodes registered directly to you due to lack of a formal certificate of registration.

• Management of business operations: Formalisation goes beyond mere registration to aspects like how you run the business.
While you may be doing sales/marketing/operations/accounts at the start, as the operations grow, there is a need to hire professionals. This may not mean full-time employees but there are possibilities of outsourcing some of these services.
A two hours-a-week walk-in accountant will keep your books in order for a fraction of the cost, and a freelance sales agent, who earns on commission, will most likely increase sales at the least cost.

• Tax Compliance: With the noose tightening on the informal economy, it is just a matter of time before you are snared. It is a known fact that when URA hardly finds any decent paperwork in place, they make exhorbitant tax guesstimates and this is what tends to get some businesses onto their knees.
The way out is to have formal operations in place such that a visit from the tax man does not spell doom.
There is also the ‘cat and mouse’ game you are likely to play with the local council authorities. You can save yourself the headache.

• Credibility: In some circles, failure to have formalised business operations means a lack of credibility.
How do you expect to be trusted to handle an international transaction without any ability for your partners to legally confront your outfit?

• Growth and continuity: If you have the expectation of seeing your business grow into something that could outlive you the founder, then it is crucial to formalise.
Uhuru Restaurants is a good example of a local business that outlived the founder, who happens to be the father to the current CEO Salim Uhuru.
While the founder started off informally, he later formalised and by the time he stepped out, the conveyor belt of progress had been set up and the business has grown in leaps and bounds since then.

• Attracting investors: You may have struck gold in a niche market and others venturing into the same market may want to buy into your establishment. A formally registered operation tends to have guidelines on how such situations are handled.

The writer is an agro, ICT and business consultant. Follow @wirejames

editorial@ug.nationmedia.com

Advertisement