The term business finances refers to the assets, liabilities, capital, revenue and expenses of the business. For you, “expenses” may or may not literally include taxes, but however you want to slice it, taxes and tax considerations obviously have a big impact on how businesses are organised and run. These financial components are tightly intertwined with each other and with the operational decisions made by the business.
1. Capital Purchases & Assets
Almost all businesses need to acquire and use fixed assets. The acquisition can be through purchasing, renting or leasing. Purchase and lease decisions in turn require ROI analysis and financing decisions. Then, once an asset is acquired, it must be recovered, or expensed, over time to reflect its depreciation and plan for its replacement. The financing and cash flow decisions involved in acquiring assets will affect both business operations and owner finances, especially in proprietorships, partnerships and closely held corporations.
2. Capital Structure
Capital structure refers to how much of the business financing is through owner equity and how much is through debt or other liabilities and how it is done, that is, the mix of financial instruments and ownership vehicles. Business capital requirements and owner decisions influence the capital structure, which in turn influences the owner’s personal finances. Entrepreneurs must decide how much of their own capital to invest in the business, how they will be “paid” for that capital (in profits, wages, interest, or other ways) and how procuring capital through loans will affect their own financial well-being.
3. Working Capital
This is a tough concept for many entrepreneurs to grasp. It is capital used to finance the flow-through, what goes into the business and what goes out of the business – not the fixed or tangible assets of the business. It is used to pay for inventory and to provide cash for other items necessary for the day-to-day running of the business. Any business that must pay a supplier or an employee before providing a product or a service to its customers or must provide a product or a service to customers before receiving payment needs working capital to make this happen.
Working capital is part of the total capital required to run a business – and the most dynamic part. Insufficient working capital can choke business operations– insufficient inventory, inability to offer satisfactory customer purchase terms, inability to pay employees or suppliers. It is very common for entrepreneurs to underestimate the need for working capital. The usual result is that the owner must kick in more capital from personal finances– or accumulate more debt. Working capital mismanagement is a common cause of personal financial failure for entrepreneurs.
4. Cash Flow
This is the bigger picture for working capital. Does the business have enough cash to meet its ongoing business needs? Does it generate enough cash through operations to replace assets, pay its owners, and fund its growth? Poor cash flow leads to inadequate business resources. It can cause many financial problems, from decreases in owner returns to severe shortages of capital that must be met eventually by the owners.
Cash flow becomes especially critical when the owners must replace key assets or as they’re implementing important growth and competitive strategies. Many a business has declined or failed because of inadequate cash flow to replace assets or to execute key competitive strategies.
5. Risk Management
We mentioned risk under Business Operations, but any business faces various financial risks. Customers don’t always pay, interest rates don’t always stay the same, tax rules change, sources of funds don’t always come through as expected, owners or investors can leave and the list goes on – all with obvious personal financial consequences.
As an entrepreneur you will make hundreds to thousands of operational decisions in setting up an infrastructure and producing your product or service.
All decisions that involve money involve the finances of the business, of course, and many, like employment and facility decisions, will affect your personal finances as an owner. And these decisions are never finished, they will adjust and evolve as your business evolves – and so will your business and personal finances. Business operational decisions include the following:
1. Employment & Employees
Whether to have employees, how many, and what kind of compensation to provide are decisions that affect business finances in obvious ways. Decisions about employee benefits and retirement plans will affect you, for whatever you decide to do for them may have consequences for you: You can participate in benefit and retirement plans, often to your advantage. Also, your decision on how to engage yourself and your spouse and/or family members as employees can impact your company finances.
2. Facilities & Location
Early on, you’ll have to decide what kind of location and building your business needs. That decision will probably have to be modified as the business grows and evolves. Naturally, like employee costs, facility costs are a major factor in the finances of most businesses. But key decisions on building ownership– buy vs lease, owner buys and leases to business – are important for personal finances. Depending on the business, many entrepreneurs look to buy their facilities to build the asset base as part of a retirement or other exit strategy for the business. In addition, the use of a home or other personal space in a business has important personal finance consequences.
3. Growth strategy & Plans
Every viable business has a strategy and a plan to grow and evolve. Decisions on how to evolve and how fast must be made in the context of both business and personal finances. Many good businesses fail because they grow beyond the asset base and working capital required to support them.
Every entrepreneur must decide how to organise his or her business. Not only are we talking about organising facilities and human resources, but also the basic legal structure of the business. The decision of whether or not to incorporate is important. If the decision is not to incorporate, important decisions must be made between or among partners, if there are partners, and contingency plans must be in place in case things change. Like most operational decisions, the organization decision is never finished.
Every business has risk and there are several kinds of risk. Operational risks – the risk of accident, mistake, or omission – produce potential liability for the business and can produce liability for the owners, depending on how the business is structured. Continuation risks concern the ability of the business to function in the case of unexpected catastrophe or unavailability of a key employee or owner. Financial risks concern the capital structure and the availability of capital and are covered below. Many of these risks are assumed and covered at the business level, but the owner must consider the risks at the personal level as well.
Planning A Year End Function On A Budget? Five Fabulous Tips To Get The Most Bang For Your Buck
Here are our five fabulous tips to use to your advantage to create an event that will leave your guests in awe.
When you’re desperate for your event to be spectacular, but only have a shoestring budget to work with, then don’t despair, and by all means don’t settle for second best – it might be time to think out of the box this festive season.
When it comes to putting on First Class events, even if our clients’ budgets lean slightly more towards Steerage, we have had our experience and expertise tested many times over, and have never failed to deliver memorable and delightful events using these techniques.
Here are our five fabulous tips to use to your advantage to create an event that will leave your guests in awe.
1. Location, Location, Location
Unless you have your own venue, sourcing one may be one of your biggest items on your event budget. This should be looked at early into the planning process. It’s imperative to book a venue in advance to avoid last minute booking fees.
When it comes to finding a venue, don’t be afraid to approach things differently. There are often clever ways of using a fancy venue that may be less expensive. For instance, instead of using a venue’s master ballroom, enquire about their balcony, courtyard, or rooftop. You still get the advantage of a spectacular setting, but at a vastly reduced cost.
Consider also that mornings are often cheaper, especially if the venue can be turned around and used for another function later. Mondays are often quiet too and thus leaves room for negotiation.
2. Fun Food and Beverage
Believe it or not, your eats and drinks are not actually the hero of the event. When allocating budget and suppliers for catering, choose options that are satisfying without feeling pressured to produce over-the-top cuisine. More than that, overly-fancy or daring food could actually make people feel uneasy, and might have the opposite effect of what you want to achieve for the event – which is, people enjoying themselves!
With a small budget you have an opportunity to think creatively and venture away from the conventional approaches while remaining cost-effective. Try fun options like food trucks or mobile kitchens, if the venue allows external vendors.
Catering can be simple, yet still a crowd-pleaser.
3. Be flexible, stay open-minded
Successful event planning on a budget is all about seeing potential. You might come across free or cheaper items which may not be the exact things you wanted, but they still do the job. It might even spark another idea for decor or an activity that can work around these budget items better.
Recycle items instead of purchasing new items for every event. Reuse these items at multiple events . You can save by choosing to have items designed in such a way that they can be reused, by only changing certain parts or nothing at all.
4. Don’t be too proud to ask for sponsorships
Consider turning to sponsors to cover expensive items that are critical to the event. You might approach an existing supplier or technical partner to your business to cover costs in exchange for some tasteful brand exposure at your event, or a mention from the podium during speeches. Ensure that you have the data and audience information to make your pitch enticing.
5. Keep track…of everything
Finally, it’s important to keep track of all expenses, including the bitty ones, as they do add up quickly. The tighter the budget, the tighter you ought to be on your spending and make sure each one of the expenses is accounted for. Make sure that you’re fully aware of any hidden fees, such as set up, delivery and break down costs, prior to signing the contracts with your venue and vendors. Unforeseen costs only tend to pop up in the final invoicing stages, with a surprising figure. Check contracts, double check proposals and counter-check with final bills.
Here’s to a fabulous Year End Function!
5 Ways To Make An Impact On A Shoestring Budget
There are several ways to get involved with NPOs that do not necessarily involve funding.
If you are an entrepreneur or small business owner that wants to give back to the community, but aren’t sure that you have the funds to make a real impact? There are several ways to get involved with NPOs that do not necessarily involve funding.
1. Donate your time
If you are a busy entrepreneur, you might be tempted to simply donate money to a charity, but making an impact is about more than just the money. Your time and commitment to a cause that you are passionate about can make a real difference. Ask what an NPO can achieve with the time and skills you are able to donate, and partner with them to reach their goals in a sustainable manner.
2. Involve your employees
Your staff and your company’s time and expertise can be extremely valuable in building capacity, by sharing knowledge and skills with NPOs. Volunteering can make your employees feel good about themselves and proud to be part of your business, improving morale. It can even help you to retain or attract staff. Millennials, especially, want to work for companies that are part of something meaningful.
3. Focus your efforts
Try focusing on one or two causes where your resources and energies make a real impact, rather than attempting to be part of solutions for too many causes. You will end up making very little difference if your efforts are spread too thin. Take the time to determine what social or development issues are close to your company’s DNA, purpose and vision.
By making sure the cause is a good fit with your company’s brand and core objectives you ensure that whatever you can offer an NPO will make an impact on their operation.
4. Be committed
Effective social engagement is about long-term relationships and commitment. It takes time and sustained effort to make a real difference to the organisations with which you partner. Take the time to understand their core purpose, capacity, resources as well as the needs of that organisation in order to make a meaningful contribution.
5. Donations of goods or products
Does your company offer a service or produce goods that might be useful to an NPO? Offering services or products that NPOs most often do not have the budget for can equip and empower them to do their work more effectively for greater impact.
A Strategic Approach To Enterprise Cost Reduction
During periods of uncertainty, companies that take bold action can recover more quickly and gain sustainable competitive advantages that boost performance both in good times and bad.
Companies in South Africa face a number of challenges that include slow Gross Domestic Product (GDP) growth, high unemployment and uncertainty associated with the current political environment. The tsunami of change driven by digital disruption as a result of the fourth industrial revolution has spread across the continent, potentially reshaping the competitive landscape in all regions. To tackle these complex and varied challenges, many South African companies may need to pursue cost reduction more aggressively.
Overall findings in Deloitte’s Strategic Cost Reduction Survey launched earlier this year found that South African companies cited “macro-economic concerns and recession” as a top external risk much more frequently than the European Union (EU) average (59% versus 34%).
Compared to European companies, South African companies posted worse historical results with over 40% of respondents stating that revenue has either remained the same or decreased over the past 24 months.
The survey found that the dual margin approach has been the norm for South African companies with cost reduction targets set very high and even higher cost program failure rates. One question to ponder is whether executives in the South Africa have subconsciously accepted the barriers and scaled back their cost reduction actions accordingly – even if a more aggressive approach to cost management could help their businesses thrive? During periods of uncertainty, companies that take bold action can recover more quickly and gain sustainable competitive advantages that boost performance both in good times and bad.
Re-examining the strategy
Before designing a cost reduction programme, make sure your overall business strategy is still relevant within the current environment. Organisations transform their business for different reasons. Some are positioning themselves for new growth opportunities while others are restructuring to improve efficiency and reduce costs. What they have in common is the desire to dramatically improve their business performance.
Cost reduction programmes are commonly carried out in silos, without much more coordination than each having some portion of an overall rand target to meet. The task then becomes so complicated and fraught with sensitivities that little happens in the way of sustainable efficiencies. But it needn’t be so. If you go to the trouble of mobilising for cost reduction, you might as well make it stick, and create some competitive advantage along the way.
Traditionally, a company bases its strategy on its best prediction of what events could affect its business, and when. But in a fast-changing business environment, you need an approach that doesn’t require you to pretend to have a clear picture of the future. One way to do this is to define a range of scenarios of what the future may hold. Then, develop the best strategy to respond to each scenario. Initiatives that make sense only for certain scenarios become your “contingent strategies.” Once you formulate the core and contingent strategies, your cost reduction program will have to be just as flexible.
Establishing a cost base
A cost reduction programme is only as good as the data it’s based on. You need detailed cost data to identify which factors are driving business costs, as well as to justify cost reductions. The next step, therefore, is to figure your current cost baseline. The cost baseline indicates the costs you would incur if you took on no new cost reduction initiatives and with a cost baseline, you can measure the effect of your cost reduction programme by comparing actual costs to the expenses that would have occurred without it.
Start by updating the current year’s budget to reflect any new efforts, such as staff changes or the introduction of new products. This is a good time to cancel anything that cannot be resourced or no longer supports your strategy. Next step is to analyse your costs and headcount by business line, function, and location. Clearly state any rules for allocating centralised functions or shared services to individual lines of business.
While you’re doing this, try to figure out how your business came to have the cost structure it does. It probably is a product of many leadership regimes and acquisitions. Understanding the history can help you identify promising areas for cost reduction. Assess how each areas performance compares to that of best-practice organisations. If there’s a gap, determine how much you’d need to improve in order to close it. At the end of this project, you should have a decent sized list of potential cost reduction initiatives.
Set Cost Reduction Targets
One way to establish cost reduction targets is to try looking at them from several perspectives, such as:
- Contribution to Strategy – How the initiative will affect your strategic goals and impact on business Continuity.
- Investor View – This is how much cost cutting you need to do to support your current share price, assuming revenues stay flat. If you look at cost reduction from all three perspectives, you can triangulate them to set a cost reduction target that’s both achievable and acceptable to investors. Competitive View – Tally how much you need to save in order to become as efficient as the top performers in your industry. Knowing what your peers have achieved can give you an idea of what you can achieve.
- Operational View – Looking at each line of business to identify potential cost savings, and then aggregate them across the company.
- Ease of Implementation – Identifying whether there are any technical or cultural obstacles to implementation and how you deal with them?
- Risk – In terms of how significant are any implementation risks?
Companies that are able and willing to make bold cost moves could find that the current economic environment is a prime opportunity to position themselves for long-term success. Tactical cost actions alone will likely not be able to deliver the required level of cost savings. Companies need to adopt new approaches to cost management, shifting to actions that are more strategic and structural, such as increasing centralisation, reconfiguring the business, and outsourcing/offshoring business processes.