2 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.”2012 GEM Global Report
3 IntroductionThe 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.
4 FactsVery few people in business maintain financial records on a daily or monthly basisVery few businesses are aware of their cash flow situation at given timesMost businesses fail because of the lack of management accounts and cannot access additional finance without these accounts
5 FactsThe 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.
6 FactsVery 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
7 The Language of Accounting …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 understood well only when accounting processes are applied specifically, uniformly and consistently regardless of the core function of the business
8 Objectives of Financial Management PRIMARY OBJECTIVESThe 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.
9 Objectives of Financial Management SECONDARY OBJECTIVESThe 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
10 Why Keep Financial Records Enable’s owner to monitor financial positionManagement of cash flowBasis for decision makingBasis for projectionsPotential investors/ buyersProof of incomeProof of net assets
11 Why Keep Financial Records Suppliers of goods, services and financeEvaluate credit riskEvaluate ability to pay when applying for financeSARSLegal right to examine records (Income Tax Act and VAT Act)
12 Neglected Financial Activities in a Business 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);
13 BudgetsA 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.
14 BudgetsIt 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
15 Budgets Develop long-term strategies and broad short-term goals/plans Identify the objectives of the organisation and the short-term goalsDevelop detailed budgets to achieve short-term goalsMeasure and evaluate performance against the detailed budgetReassess the objectives, goal strategies and budgets and make changes where necessaryPLANNINGCONTROL
16 Steps In Drafting A Budget Analyse results from previous periodReview assumptions about external environment and own businessSet goals and objectivesAdjust figures from income and expense accountsReview results and adjust where necessary
17 Cash Flow Management Some Basic Internal Controls… Trust nobody with cash!!Bank all cash takings intactDeposit takings every dayPhysically secure inventoryCheck bank statement yourselfPay only on sight of original suppliers invoiceCheck arithmetical accuracy of all documentsOpen the post yourself
18 Managing cash flowCash book that is regularly balanced – minimum monthlyReconcile with bank statement – outstanding cheques, debit orders that will still come off the bankKnow what you have sold and when you should receive the cashMonitor creditor purchases and paymentsPlan in advance for month-end paymentsNever issue a cheque unless there is adequate funds to coverPrioritise debt collection
19 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 timeR/D cheques, unpaid debit orders [poor relationship with bank]
20 Managing DebtSome questions to ask about your clients debtors managementDo 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 debtorsHave you been owed money for more than a yearDo you keep a record of overdue accountsWhat is your level of bad debts?
21 Credit policy – Key questions Can the business answer the followingWill we sell on creditWhat percentage of total sales should be on creditWill there be a selling price differential – cash discountHow will clients qualify for creditWho will assess the applicationsWhat will the conditions beHow will the debtors accounts be managed
22 Controlling ExpensesDuring 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.Don’t confuse business and personal expenses.Keep detailed and accurate purchasing records.Run reports early and oftenContinue financial responsibility.Look at cutting down on expenses.
23 Borrowing MoneyWe all know that small business lending is down. Still, despite the lending challenges facing small business owners, there are loans being approved and, although it’s never easy nowadays, qualified small business owners are getting approved for many different forms of financing to start, build and grow their businesses.
24 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 you’re requesting? .
25 Dangers Of Borrowing Money Not Being Committed to Maintaining (or improving) your Personal CreditAlthough bank financing is challenging to get, it’s 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
26 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.
27 Dangers Of Borrowing Money Choosing the Wrong Loan for Your PurposeDo 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 that’s best for you.
28 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 borrowingPlan effectivelyExamine short-term vs. long-term debtBase new debt on current needs
29 Financial Ratios Analysis Management Accounts is not just about preparing financial statements it also entails being able to interpret the financial statementsHow 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
30 Financial Ratios Analysis – Liquidity USED TO DETERMINE COMPANYS ABILITY TO PAY OFF ITS SHORT TERM DEBTCURRENT RATIO (Recommended 1,5:1 to 2:1)= Current Assets / Current LiabilitiesQUICK RATIO (Recommended 1:1 to 1,5:1)= Current Assets – Stock / Current LiabilitiesCASH LIQUIDITY= Cash in Hand / Current Liability
31 Financial Ratios Analysis – Profitability AVERAGE MARK-UP %= Gross Profit / Cost of Sales x 100AVERAGE GROSS PROFIT %= Gross Profit / Sales x 100NET PROFIT MARGIN %= Net Profit BIT / Sales x 100
32 Financial Ratios Analysis – Efficiency AVERAGE DEBTORS COLLECTION PERIOD= Debtors / Credit Sales x 365 or x 12 monthsAVERAGE NUMBER OF DAYS INVENTORY STAYED IN STOCK= Average Stock / Cost of Sales x 365or= Average Stock / Cost of Sales (No of times per year)AVERAGE CREDITORS PAYMENT DAYS= Creditors / Credit Purchases x 365 or x 12 months
33 Financial Resolutions Just like individuals draw up a list of New Year’s resolutions to steer their life in a desired direction, the small business owner should jot down resolutions that’ll 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 budgetI will manage the cash flow betterI will assess all expensesI will reduce my personal spending
34 ClosureIn 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.