Introduction … …If the economy in general has a positive attitude towards entrepreneurship, this can generate cultural and social support, financial and business assistance and networking benefits that will encourage and facilitate potential and existing entrepreneurs GEM Global Report
Introduction The South African economy has escaped much of the financial disasters experienced in the global economy. This can be attributed to the financial controls instituted by government e.g. FICA Act, Consumer Protection Act. However another big challenge facing small business owners is their lack of financial responsibility in their business and their lack of understanding financial terminology.
Facts Very few people in business maintain financial records on a daily or monthly basis Very few businesses are aware of their cash flow situation at given times Most businesses fail because of the lack of management accounts and cannot access additional finance without these accounts
Facts The majority of businesses have their management accounts done once at the end of the financial year which in most instances is too late to carry out a business rescue. The majority of businesses do not know or understand the management accounts drawn up by their Accountant and neither do they question them. The majority of businesses do not sit down with their Accountant and discuss their financials in detail with their Accountant.
Facts Very few business owners understand accounting terminology. In some instances they do not know what a debit or a credit is, cashbook, general ledger, cashflow statement, Cost of Sales. Very few business owners apply basic financial ratios to assist them in analysing their business. Very few business owners draw up an annual budget and measure performance against this budget
The Language of Accounting …is used to communicate messages about the finances of the business to all stakeholders …is used to communicate messages about the finances of the business to all stakeholders …is very important to use if we wish to communicate with other stakeholders …is very important to use if we wish to communicate with other stakeholders …is understood well only when accounting processes are applied specifically, uniformly and consistently regardless of the core function of the business …is understood well only when accounting processes are applied specifically, uniformly and consistently regardless of the core function of the business
Objectives of Financial Management PRIMARY OBJECTIVES The primary objective of the small business is to gain maximum return on the capital invested in the business. Simply put: the business wants to make a profit. The owner(s) of the small business would like the business to be profitable, to grow and to succeed. Without a satisfactory return, this will not happen.
Objectives of Financial Management SECONDARY OBJECTIVES The secondary objectives are the following: Best utilization of resources; Healthy liquidity position; Effective cash management; Best loan conditions and interest rates; Effective budget system; Growth in the business
Why Keep Financial Records Enables owner to monitor financial position Management of cash flow Basis for decision making Basis for projections Potential investors/ buyers Proof of income Proof of net assets
Why Keep Financial Records Suppliers of goods, services and finance Evaluate credit risk Evaluate ability to pay when applying for finance SARS Legal right to examine records (Income Tax Act and VAT Act)
Some Financial activities in a small business that are neglected or very little attention paid to include the following: Budgets; Cash flow management; Record-keeping of all financial transactions and their results; Internal controls; Analysis of financial statements (financial position of the business); Neglected Financial Activities in a Business
Budgets A complete budget that relates to the objectives of a particular business enhances the decision- making process and has the following uses: It serves as a planning aid, and its compilation virtually always leads to refinement of the short-term plans. Budgets are an indispensable means of control.
Budgets It serves as a means of conveying policy to subordinates who are responsible for implementing policy-specific guidelines. It is an instruction to subordinates and delegates the authority needed for them to act. Performance can be measured. Goal orientation
Budgets Develop long-term strategies and broad short-term goals/plans Identify the objectives of the organisation and the short-term goals Develop detailed budgets to achieve short-term goals Measure and evaluate performance against the detailed budget Reassess the objectives, goal strategies and budgets and make changes where necessary PLANNING CONTROL
Steps In Drafting A Budget Steps in drafting a budget Analyse results from previous period Review assumptions about external environment and own business Set goals and objectives Adjust figures from income and expense accounts Review results and adjust where necessary
Cash Flow Management Some Basic Internal Controls… Trust nobody with cash!! Bank all cash takings intact Deposit takings every day Physically secure inventory Check bank statement yourself Pay only on sight of original suppliers invoice Check arithmetical accuracy of all documents Open the post yourself
Managing cash flow Cash book that is regularly balanced – minimum monthly Reconcile with bank statement – outstanding cheques, debit orders that will still come off the bank Know what you have sold and when you should receive the cash Monitor creditor purchases and payments Plan in advance for month-end payments Never issue a cheque unless there is adequate funds to cover Prioritise debt collection
Impact of poor cash management Inability to pay creditors on time [impacts on relationship, interest charges, penalties] Overdraft facilities used [increased interest payments] Employee dissatisfaction if salaries not paid on time R/D cheques, unpaid debit orders [poor relationship with bank]
Managing Debt Some questions to ask about your clients debtors management Do your customers buy on credit? Do you know how long they usually take to pay? Do you know how much money is currently owed to your business? Do you keep a record of debtors Have you been owed money for more than a year Do you keep a record of overdue accounts What is your level of bad debts?
Credit policy – Key questions Can the business answer the following Will we sell on credit What percentage of total sales should be on credit Will there be a selling price differential – cash discount How will clients qualify for credit Who will assess the applications What will the conditions be How will the debtors accounts be managed
Controlling Expenses During these challenging economic times, managing expenses has increasingly become a priority for many small-business owners. When reviewing your expenses, consider the following: Watch expenses from day one. Dont confuse business and personal expenses. Keep detailed and accurate purchasing records. Run reports early and often Continue financial responsibility. Look at cutting down on expenses.
Borrowing Money We all know that small business lending is down. Still, despite the lending challenges facing small business owners, there are loans being approved and, although its never easy nowadays, qualified small business owners are getting approved for many different forms of financing to start, build and grow their businesses.
Dangers Of Borrowing Money Some of the biggest dangers of borrowing money the wrong way when building a business: Allowing Lenders to Take Too Much Collateral with a Loan -Can you borrow the money you need without pledging any collateral to the bank? -What is a reasonable collateral request based on the loan youre requesting?.
Dangers Of Borrowing Money Not Being Committed to Maintaining (or improving) your Personal Credit Although bank financing is challenging to get, its always going to be the cheapest form of funding your business. There are alternative financing options galore but it should always be your goal to get your business to be bankable. In other words, you want to be able to obtain your loans and lines of credit from a registered financial institution e.g. SEFA, IDC, Banks
Dangers Of Borrowing Money Not Knowing the Impact of Your Loan on Your Budget and Cash Flow -What impact does the loan have on your Budget? There are two important factors here: Use the funding you obtain for RGA (revenue- generating activities).. Keep in mind that cash flow is usually more important than interest rates i.e. if you can extend a loan period in exchange for a little higher interest rate, consider what lower payments mean to cash flow.
Dangers Of Borrowing Money Choosing the Wrong Loan for Your Purpose Do you need a loan or a line of credit? Based on your credit, business, industry, collateral, revenue, profit, etc., do you know what your borrowing options are? If you understand what your options are, you can choose the loan solution thats best for you.
Dangers Of Borrowing Money So the question each business owner must ask themselves is whether taking on debt is a good idea for your business. Below is a guideline to assist you with the decision: Explore your reasons for borrowing Plan effectively Examine short-term vs. long-term debt Base new debt on current needs
Financial Ratios Analysis Management Accounts is not just about preparing financial statements it also entails being able to interpret the financial statements How do we do this? By applying various financial ratios. These ratios will highlight any serious problems relating to your business from a cash flow perspective
Financial Ratios Analysis – Liquidity USED TO DETERMINE COMPANYS ABILITY TO PAY OFF ITS SHORT TERM DEBT CURRENT RATIO (Recommended 1,5:1 to 2:1) = Current Assets / Current Liabilities QUICK RATIO (Recommended 1:1 to 1,5:1) = Current Assets – Stock / Current Liabilities CASH LIQUIDITY = Cash in Hand / Current Liability
Financial Ratios Analysis – Profitability AVERAGE MARK-UP % = Gross Profit / Cost of Sales x 100 AVERAGE GROSS PROFIT % = Gross Profit / Sales x 100 NET PROFIT MARGIN % = Net Profit BIT / Sales x 100
Financial Ratios Analysis – Efficiency AVERAGE DEBTORS COLLECTION PERIOD = Debtors / Credit Sales x 365 or x 12 months AVERAGE NUMBER OF DAYS INVENTORY STAYED IN STOCK = Average Stock / Cost of Sales x 365 or = Average Stock / Cost of Sales (No of times per year) AVERAGE CREDITORS PAYMENT DAYS = Creditors / Credit Purchases x 365 or x 12 months
Financial Resolutions Just like individuals draw up a list of New Years resolutions to steer their life in a desired direction, the small business owner should jot down resolutions thatll make for a successful financial year. But where to start? With the basics of course. Here are 4 financial resolutions to start with: I will draw up a realistic budget I will manage the cash flow better I will assess all expenses I will reduce my personal spending
Closure In closing being financially responsible is crucial as you advance your business. When you address these financial responsibilities, discussed briefly today, for small businesses, you will be rewarded with financial flexibility as you grow the company.