Old habits die hard Image

Old habits die hard: efficient expense classification for small and medium companies


Bad fiscal habits trigger unnecessary risks. To get rid of them and to embrace an efficient practice, it is necessary to understand the law, as well as to internalize the benefits of the correct classification of the expenses.
The habit to use the company card to pay for expenses that are not deemed as appropriate is still present in a lot of organizations. That is the reason why the authorities are conducting inspections every new year with a special focus on the highly suspicious settlement expenses: pharmaceuticals, holidays/accommodations, beauty services, perfumes, clothes. A particular attention is paid to the supermarket invoices including a wide range of expenses. Having said that, it is mandatory to treat more carefully the deduction of the expenses and the supporting up documentation, to avoid any interpretations.
Incorrectly deducted expenses, lack of supporting documents and loose explanations for these expenses pose penalties risk whilst increasing the probability to compromise company growth and hence development opportunities.
Regulatory compliance:
According to the Romanian Tax Code, law no 11, when determining the amount of a mandatory tax or social contribution, the authorities may re-qualify any transactions if deemed out of  business’s scope but aligned to directors/administrators vested interests. In case the transaction is deemed not properly qualified, the authorities re-qualify it to reflect the real economic scope, adjustingits tax effects. Through re-qualification, these expenses may be deemed as employee’s personal benefits, liable to social security contributions or as payment made on behalf of the director/administrator, liable to revenues tax rates- 10%.
Consequently, the tax paid to the state budget may be higher in those circumstances, and this situation can be avoided by a better analysis, separating from the outset such personal expenses from company expenses. The benefit is obvious: the rate of the dividend tax which must be paid is at its lowest level in the last 30 years - 5% for medium and small companies. Since last year, the companies with a turnover less than 1 million euro pay 1% revenue rate and no profit tax. Moreover, the associated risks are higher than any potential advantages coming from „saving up” 5% on the short term by „deducting some personal expenses” and „paying less taxes to an incompetent manager of our money - the state” .
These old habits and ways of thinking, originating historically during periods of high taxation policies, make small companies overlook and forfeit significant benefits. Let’s see how.
A company is dependent not only to its shareholders, but also to its stakeholders:

  • The clients - Before entering in a commercial relation with the firm, clients are looking at its performance. Make sure your firm shows strong growth in all performance indicators, both turnover and profit margin.
  • The stakeholders - If the firm registers profit and the turnover is having a positive growth rate, it means that management is performing well and the stakeholders will receive dividends, so everybody will be happy.
  • Employees - In a world in which is even harder to find loyal people, believing in your vision, than clients for your products, make sure you recognize and reinforce their value and contribution. You will be able to do this with good financial indicators.
  • Government - A good collaboration with public institutions cansave you from a lot of headaches.Moreover, the government interest is always in company’s growth and development, as in this way it the collected tax can be maximised. Please bear in mind that the revenue tax rate is between 1%-3%.
  • Banks and investment vehicles - Every firm, at a certain point, is looking of ways to maximize its cash flow. When financial assistance is required, the company performance is evaluating by assessing its key performance indicators. The better these indicators are, the higher the chances to attract funding are.

Would you like to prepare for an exit? Even if the story of your company is highly compelling, the sale price is determined by the financial indicators as well.
A firm with no or little profit decreases is practically jeopardizing its growth and development perspectives as it is perceived as nonperforming by financial institutions or potential investors. The financial institutions are evaluating the companies in terms of equity, assets and its liabilities; the more performing they are the greater are the chances of attracting funding. Both performance and nonperformance have long term consequences.
The most important thing to look after when overhauling the company fiscal discipline is to revamp the old way of thinking and consider more up to date and modern ones, in accordance to the context whilst complying with the tax and legal requirements. That is the right ground to nurture good and healthy habits for the present and for the future.
As your accountant partner, for more than 10 year in the local top of romanian accountancy companies,  we always take long-term company health perspective and consequently assist you in consistently develop your business and financial mindset.