Navigating saving methods for your business and personal finances
South Africans have always been scrutinised for their ability to save, and with July marking National Savings Month – an initiative by the South African Savings Institute (SASI) which encourages all South Africans to embrace the idea and action of saving – there is a focus on the need to save.
But, given the declining economy and recent statistics the National Credit Regulator which show the total outstanding debt owed by South African consumers has increased by 2.94% to R 1.66 trillion, it emphasises how entrepreneurs, just like any other consumer, are feeling the pinch financially and potentially cutting back. However, at the same time, their livelihood relies on consumer spending for business profit.
This predicament means that an entrepreneur’s ability to save can affect both the bottom line of their business, as well as their own personal finances.
Putting the pressure that entrepreneurs are faced with into perspective is Statistics South Africa’s latest Consumer Price Index (CPI), a measure examining the average prices of consumer goods and services. In May 2017, the CPI rose for the first time in 2017 to 5,4% (from 5,3% in April 2017), and average prices increased by 0,3% (from 102,4% in April to 102,7% in May). While marginal, the price increases of goods and services – ranging from food and beverages, to transport – has a knock-on effect on South African consumers and places additional pressure on already strained budgets, resulting in less consumer spending, and thereby, potentially less business for local businesses.
As the challenge of saving and effectively maintaining cash flow can affect both experienced and inexperienced entrepreneurs, precautionary steps need to be taken.
While entrepreneurs may face different hurdles depending on the life stages of their respective businesses – a veteran entrepreneur may fall victim to bad financial management and overspending, while start-up entrepreneurs run the risk of mismanaging their loan repayments, whether from a financier or their own personal credit cards – the fundamental measures to successfully manage their finances remain the same.
Here are five tips for managing your business finances to avoid an impact on personal savings:
- Separate personal and business finances: Entrepreneurs should define their salaries based on what their businesses can afford and not the lifestyle which they wish to maintain. Not only will this be financially beneficial in the long run, but it will also prevent discrepancies when SARS assesses the business as well as the owner’s personal income tax.
- Keep up with your debt repayments: It is important to bear in mind that saving hard earned money whilst still in significant debt can lead to further implications as the cost of debt can be more than the interest earned from savings. Repaying debts can therefore be seen as the most important foundation when it comes to saving, as once an entrepreneur is no longer in debt, it is often easier to obtain bond type funding or access an overdraft facility in the case of emergency.
- Streamline business processes: In order to minimise unnecessary debt, weigh up the costs incurred versus the productivity produced within the business. This can be done by continually reviewing processes and looking for ways to be as cost effective as possible.
- Curb spending: Consider each expense before it is incurred and limit fixed monthly costs to the bare minimum. Another way to curb spending is to not invest in non-income producing assets such as cars, houses, boats and other tools that aren’t essential to the business.
- Account for late payments: To minimise late payments, it can be beneficial to offer an early settlement discount to debtors that pay within 30 days. Such a discount usually ranges from 2% to 5%, which can be attractive for regular clients as it adds up to a significant amount over a 12-month period. Alternatively, another option is to make use of a debtors factoring house that can facilitate with invoice discounting for the business, and depending on the quality of debtors, an advance can be made up to 80% of the invoice value per debtor. This is a common form of working capital financing, but can be a very expensive form of funding.
Although the current economic climate is tough, entrepreneurs are renowned for taking whatever means necessary to drive their business forward. I always marvel at the resilience of entrepreneurs and how they innovatively face and conquer challenges. Keep it up, entrepreneurs. You are the heroes of our economy!