Tag: VAT

Ten tips for managing the lifeblood of your business

Posted on by Business Partners Limited
By Byron Jeacocks

Regional General Manager, BUSINESS/PARTNERS

Nothing is as important to the financial health of a growing small business as the constant, predictable flow of cash, because if the cash dries up, the business will die.

Cash is to a business what oxygen is to a body – it simply cannot survive without it, even briefly.

The one plan that every entrepreneur must have to ensure survival is a cash-flow budget, and you must stick to it as if your life depended on it. The following tips should make sure that enough cash keeps flowing through your business.

1. Underestimate your sales and overestimate your expenses

Unfortunately entrepreneurs, being optimistic by nature, tend to do the opposite. Great sales are predicted and expenses ignored, with the result that the cash flow budget starts off from the wrong base. If you are working on the cash-flow budget of an existing venture, base your predictions on the historical figures, and be conservative with any sales increases. Remember to take seasonality into account. With a new venture, use only the most likely, tangible sales that you will be able to make, not some abstract market-share calculation.

2. Be frugal

Cut out all nice-to-haves from your overheads as well as any capital acquisitions. Check your expenses regularly. Overheads have a sneaky way of constantly creeping up, and they need to be checked and queried regularly. Be careful, though, not to cut too deeply, especially when it comes to marketing expenses, which often seem like luxuries but can actually be an indispensable investment for future sales.

3. Avoid unnecessary debt

It is actually easier to find finance for your business than is generally thought, especially if you broaden your sources to family and friends. The real hard part of business finance is paying it back, rather than finding it. Use debt only as part of a carefully managed financial plan. Try to match the term of the debt to the lifespan of the asset that you’re buying.

4. Have a strong credit policy

Very few businesses can afford a client going bankrupt with a large outstanding invoice. It is important to have some form of credit vetting – don’t simply offer the same terms to every client that comes along.

5. When you do sell on credit, be absolutely clear about the credit terms and hold your debtors to them

Many entrepreneurs, who are often involved on the sales side of the business, feel uncomfortable getting involved in chasing up overdue invoices, to the extent that they even accept short and late payments. There is a fear that informing a client that you need the money will send a message that your business is in trouble, or weak, and that this perception may complicate future negotiations. The answer lies in clear credit terms, and insisting from the start that all your clients stick to them. A friendly but firm staff member can be tasked to chase up the invoices.

6. Keep your invoices timely and accurate

Many debtors will use the least excuse to delay payment. Don’t give them one by letting mistakes creep into your invoices. Make sure the information in the invoice is clear and include your debtor’s VAT number and your banking details so that it becomes easy for your client to pay you.

7. Work on your creditors

If your growing business gets paid after it has to pay its creditors, it will remain painfully cash hungry. Your aim must be to negotiate longer terms with your creditors than you have with your debtors. Avoid making yourself guilty of the same delaying tactics that some of your debtors will try on you. The key to good creditor terms is trust built up over years of prompt payments and good communication.

8. Free up the cash in your unsold stock

Putting slow moving stock on sale not only returns cash to your business, but gives you an opportunity to create some excitement and draw in new customers.

9. Liquidate your white elephants

Selling unused assets cluttering up your work space can give your business a welcome cash-flow boost.

10. Don’t do the ostrich trick

When you experience a cash crunch, the worst thing you can do is to stick your head in the sand and believe that your creditors can’t see you. Yet this is what many entrepreneurs do – they avoid taking phone calls from creditors, they jump to new suppliers and postpone making contact until they are able to settle the bill in full,

The right approach is to be open and upfront about your situation. Small, incremental payments show your creditors that you are still around and in business. Even if your account is overdue, negotiate cash purchases with the same supplier rather than jumping to a new one.

When cash dries up in your business, production falters, clients are let down and you lose business fast. But there is also the immense emotional strain on the entrepreneur that needs to be taken into account. It spills over into the workplace morale and can lead to bad, panicky decision making. As always, a sober plan to get out of the crisis might save your business. But by far the best option is never to get into a cash-flow crisis in the first place.

No business is too small for a proper budget

Posted on by Business Partners Limited

Many business owners mistakenly think their operation is too small for a formal budgeting process. The budget (of sorts) that many business owners keep inside their heads is often more like a basic recipe, and is usually inadequate to deal with the constant change that every business is subject to.

This is according to Jeremy Lang, regional general manager at Business Partners Limited, who says that no business is too small for the discipline of hammering out a formal budget – which needs to be used daily in the management of a business.

He says that proper and thorough budgeting is beneficial to a business as it clearly impacts on its long-term growth prospects. “Business owners who compile and use formal budgets know well in advance when cash will run out and can plan for it. They can also plan properly for business expansion and their financial decisions are often based on carefully thought through facts and figures. In short, budgeting gives them financial control over their businesses.”

Lang says that a business owner must ideally budget at least once a year for the 12 months ahead, but in order for the exercise to be in any way meaningful, the process must meet a few crucial requirements:

  1. The business owner must be involved in setting up the budget. This exercise provokes thought (on the part of the business owner) and it assists in planning once he / she sees the detail. One shouldn’t be leaving a budget up to a bookkeeper or accountant.
  2. An annual budget that is drawn up only to be kept in the bottom drawer means nothing. The value of a budget comes to the fore only when a business owner constantly reviews it, consults it, adapts it and compares the forecast figures with the actual figures – at least once a month, in order to identify material variances.
  3. A budget based on actual figures from previous cycles is a good platform to start with.

A budget for any business should include at least a sales forecast, a cash-flow forecast, and income and expenditure forecast, a capital expenditure forecast and a balance sheet forecast, says Lang.

He explains that of these, the most important working document for any entrepreneur is the cash-flow forecast. “Without a cash-flow forecast, a business is at a high risk of running out of cash at some point.”

“Many of the common mistakes that business owners make in budgeting has to do with the cash-flow forecast. It is very important that the cash budget takes into account the realities of the business’s debtor and creditor cycles. Business owners must take into account the cash lag from the date of having to pay suppliers to the date on which payments are received from customers.”

Lang adds that often business owners neglect to work taxes such as PAYE, VAT and provisional tax payments into their cash-flow forecasts.

Another crucial part of budgeting is the sales forecast, which needs to be as accurate as possible, says Lang. “One of the greatest strengths of entrepreneurs – their optimism and can-do attitude – can also be a limitation if sales predictions are set too high. Realistic yet challenging sales forecasts should be set.”

He warns that despite its obvious benefits, budgeting is still often neglected by business owners, due to factors such as sudden spikes in sales and increased cash flow, or absolute focus on day-to-day operations. “It is very easy to drop your guard and take your eye off finances and business owners need to guard against these bad habits.”

Lang advises such entrepreneurs to rope in support from an advisor or reputable accountant who could help with drawing up a budget. “The mere step of making an appointment with an accountant helps to enforce the discipline of preparing for the meeting, and taking a step back from the operations to reflect on the finances.”

He says that business owners who struggle with budgeting often find that, once they grasp the basic principles, and become comfortable with using spread sheets, compiling and reviewing budgets do not take much effort. “It is not a complex, nor daunting exercise. All business owners need to do is seek proper advice and support, and then dedicate time to draw up a budget,” concludes Lang.

Build your own support network

Posted on by Business Partners Limited

The business support landscape in South Africa for young entrepreneurs is like the business world itself: it is teeming with opportunities, but you will have to seek them out yourself and build your own support network. Nobody is going to hand it to you on a silver platter.

For decades, various spheres of government, corporates and development organisations have been setting up “one-stop shops”, “help desks” and “local business service centres” – places where an entrepreneur can get affordable help with anything ranging from compiling business plans to finding finance and setting up administration systems.

The idea is good, says Byron Jeacocks, regional general manager for Business Partners, but so far none of these projects has managed to sustain and grow a consistently good service. He points, for example, to parts of the Umsobomvu Youth Fund which had been successful in helping a number of young entrepreneurs set up in franchising, but it ended when the fund was collapsed into the National Youth Development Agency.

Support opportunities may well be found in the many similar institutions established at municipalities, provincial governments, and national agencies such as the Small Enterprise Development Agency and the new Small Enterprise Finance Agency.

The advantage is that services are often subsidised and are therefore affordable. Finance may even be available in the form of grants. But the disadvantage is that the quality of service may vary considerably, and young entrepreneurs should scout around widely for good alternatives if the subsidised ones fail to live up to their promises.

In fact, it is entirely possible for young business owners to build an excellent support network for their business without any state-sector support.

It starts, says Jeacocks, with the acknowledgement by the young entrepreneur that business support is much wider than access to business finance. “If you don’t have to borrow money, don’t. You don’t need a million rand to start a business.”

More often than not, young entrepreneurs rather need support in setting up and managing systems in their businesses, including people management, VAT returns, sales, bookkeeping and cashflow forecasting. Because many entrepreneurs are unaware of where to find help in building these systems, they simply focus on production (fixing cars, landscaping or whatever the core service of the business is) and neglect the other aspects of running a successful business.

Once they acknowledge that they need help and that there is no single state institution set up to provide such support, young entrepreneurs must set about building their own support network.

For general business skills training they can reach out to dozens of commercial institutions offering part-time courses in every city and university, and correspondence learning is accessible in even the most far-flung rural town in South Africa. It is hard to pay the kind of rates charged by unsubsidised courses, and it is even harder to commit the time and energy required to finish a course while running a business. But Jeacocks says it is often the single investment with the highest return that business owners make in their career.

A crucial part of any business support network that young entrepreneurs often overlook is other business owners. Jeacocks says he finds that inexperienced entrepreneurs are the only ones that try to keep their operations and plans secret. If they are lucky, they find out sooner rather than later that experienced business owners are remarkably willing to share information, tips, advice and even customers. There is no harm in reaching out to business owners around you.

They are often busy, however, and one of the best ways in which to network with other business owners is through your local business chamber where you can meet them when they are themselves in networking mode. Jeacocks believes that South African business chambers are untapped and unappreciated for their potential to support young entrepreneurs.

Many successful entrepreneurs acknowledge the role of a mentor in their career. This can be a family member, a business teacher or an older or retired business owner. Such mentors are everywhere in South Africa. Sometimes they are formally organised in projects such as Business Partners’ Mentorship programme, but more often they need to be sought out purposefully by young entrepreneurs at business chamber meetings, industry associations and through referrals from other business owners.

Jeacocks draws a distinction between a consultant, who charges by the hour and wants to make a living out of advising businesses, and mentors, who do not need the money and who simply want to give something back to the business community by advising young entrepreneurs.

A key figure in a business owner’s support network is the accountant. In too many businesses, the accountant is seen as a monthly grudge payment made to keep the taxman from the door. Such an attitude is a waste of a potential goldmine of business support.

Good accountants will help you set up your bookkeeping system so that your accounting fees are kept to a minimum. They will help you understand financial statements so that you can use them to manage your business. They will use their insights into other, similar businesses to advise you on whether you are operating according to industry benchmarks. They can help you to prioritise your compliance to laws and regulations. They can use their network to help you set up other members of your support team – a labour expert, lawyer and even service providers such as an IT expert. None of this is free, of course, but a good accountant will make sure that it’s worth the money.

Spend a good bit of time and energy in finding a good accountant, starting with referrals from other business owners. This is one appointment that you should not simply make out of the Yellow Pages.

By its very nature, starting your own business is a do-it-yourself project, and young entrepreneurs must not expect individuals and institutions to fall over themselves to offer support. But an entrepreneur does not have to be lonely, says Jeacock. With the right attitude and willingness to work at it, young business owners can build a substantial network of people around them who really want to see them succeed.

Tax relief welcome but still not enough incentive for SA small businesses

Posted on by Webmaster

Although Finance Minister Pravin Gordhan has given further tax relief to small businesses and micro-enterprises in his 2012/13 Budget, there still remains very little incentive for small businesses to start up and flourish in South Africa.

Professor Matthew Lester, speaking at the launch of the 2012 Sanlam / Business Partners Entrepreneur of the Year ® competition, says that tax relief in any form is welcome, but at the current level it will not necessarily encourage small businesses and micro-enterprises to grow at the rate required to stimulate the local economy effectively.

“In some cases it may even be beneficial for small businesses to remain at their current size in order to keep qualifying for the reduced tax. That is why it is imperative that tax incentives are tailored to foster growth in the SME sector,” says Lester.

He explains that in terms of the new budget, the tax-free threshold for small business corporations has increased to R63 556, the 10% rate has been reduced to 7% and the threshold to which this rate applies has been increased to R350 000. “For taxable income above R350 000, the normal 28% corporate rate applies.”

According to Christo Botes of the Sanlam / Business Partners Entrepreneur of the Year ® competition, a taxable income of less than R350 000 is a very small business. “There should rather be a complete tax holiday for the first three to five years of business and a rebate should be paid for sustainable jobs created over this period of growth.

“Essentially, businesses in South Africa are better off overall as a result of these changes, but the benefits are not readily apparent,” says Botes.

Finance Minister Gordhan also announced that qualifying micro-businesses, within the R1 million turnover limit, will be able to pay turnover tax, VAT and employees’ tax twice a year. This means that the number of returns and payments a year will be reduced from about 18 to just two.

“Although this is positive from a red tape perspective, the turnover of R1 million is minimal and formal registered businesses within the manufacturing, construction and retail sectors will receive very little benefit from this as their turnovers should be way above R1m to remain sustainable,” says Botes.

According to Botes, the new competitiveness enhancement programme – which has been initiated as part of the industrial policy action plan, building on existing production incentives in the automotive and clothing and textile sector – is however a positive step. “These sectors are known as key job creators and are mainly run by small businesses.

“The automotive industry has various tiers of manufacturers and it is often small and medium-sized enterprises that do most of the component manufacturing.”

He says that the objectives of government’s draft National Development Plan and vision for 2030 will also effectively support job creation and SME development. “The growth of the manufacturing and agricultural sectors will potentially result in the creation of new small businesses, as well as the expansion of existing businesses.”

Botes adds that the National Tooling Initiative in support of accelerated apprentice training is also a positive initiative that has been discussed a great deal in the past. “We look forward to hearing more details on the roll-out of this initiative, as the potential is for smaller manufacturers to take on apprentices, thus playing a key role in practical training and fostering crucial skills development.”

He says that though the latest budget has outlined a positive vision for the growth of SMEs, more needs to be done practically to profile the success and significant job creation achievements of entrepreneurs across South Africa. “This is the primary aim of our annual competition, which we believe plays a crucial role in elevating the standard of entrepreneurial activity locally, as well as fostering a national entrepreneurial spirit that directly translates into job creation,” concludes Botes.