“Forecasting is the art of saying what will happen, and then explaining why it didn’t” Anonymous (communicated by Balaji Rajagopalan)
The South African landscape lends itself to the fact that many individuals have limited education and training on basic financial literacy skills. These individuals form part of the pool of prospective entrepreneurs. Without basic financial literacy and adequate business knowledge, an entrepreneur might not distinguish profit from cash in the bank.
Related: Budgeting Basics
They start living a lavish life and realise too late that there is no money to pay funders, investors, suppliers, employees, and creditors.
It can be argued that countless prospective entrepreneurs do not understand the financial requirements and obligations of a business, including aspects such as tax obligations, financial costing, pricing strategies, financial control and VAT. Financial projections can be difficult and time consuming to compile, especially for start-up companies that have not past trading record.
Following is a list of the most common wrong fiscal assumptions made when compiling a Financial Projections Model:
1. Underestimating operating costs
While entrepreneurs remember the obvious expenses, they often forget related items that can quickly add up. As an example, expense items such as insurance, employee-related costs, e.g. PAYE, UIF, pension fund contributions, etc. are often omitted, which can severely impact the expected operational expenses.
2. Underestimating start-up costs
Entrepreneurs are routinely too optimistic about how quickly sales will build and their business will sustain itself. They often mistakenly believe that as soon as they close a sale they’ll have money. They forget that people can sometimes only pay after 60 days or in some cases, not pay at all.
3. Mispricing products or services
New entrepreneurs often arrive at a price for their product or service by adding up their costs and adding on the margin they think they ought to make. The approach is typically too simplistic and ignores important factors like market position and the real value of your product.
4. Not providing a cash-flow analysis
Potential investors want to see that you understand the concept of cash flow and how you intend to spend their money.
“Prediction is very difficult, especially if it’s about the future” Nils Bohr, Nobel laureate in Physics
5. Underestimating your variable expenses
While fixed expenses are those that will stay constant and you can expect to pay consistently, variable expenses will vary depending on your level of business activity. Of course there’s no way to definitively account for all variable expenses, but you can identify key variables, take them into consideration, and factor them into your calculations.
6. No assumptions listed
When you create a set of financial projections you are making numerous assumptions. Some of those assumptions might not be that important because they make a small impact on your bottom line.
Potential investors probably doesn’t care if you are off by a rand or two on the price of stationery, so don’t worry about listing that assumption, but for assumptions that have the potential to impact your profitability and cash balance in a significant way, make sure to include a listing of important assumptions with your financial projections.
7. No bad debt expense
Business owners commonly exclude bad debt expense from their budget. Bad debt expense can vary greatly depending on industry, but there are few industries where you collect every rand of sales earned.
Will 1% of your customers fail to pay, or will 10% fail to pay? This is an important consideration, and failing to include this line item in your forecast can be a warning sign for potential investors.
“I have enough money to last me the rest of my life, unless I buy something” Jackie Mason
8. Excluding loan payments
This is probably the worst mistake entrepreneurs make, forgetting to include your loan payment in your financial projections. If you are applying for a loan, you should estimate the interest rate, amount, and length of loan to come up with a projected monthly payment.
Moreover, the interest portion payable needs to be reflected in your Profit and Loss (Income) Statement while the capital portion payable needs to be reflected on the Cash Flow Statement.
9. No contingency and room for error
If your financial projections leave no room for error investors and bankers will be nervous. Leaving no margin for error means that if even one assumption is wrong, you could go bankrupt. Typically, banks don’t take those kinds of risks, so if your projections are that fragile, you may want to focus on including a contingency to absorb the potential risk.
10. Excluding founder salary
If you want to operate a sustainable business, then at some point you need to take home a salary as the owner. If your projections never include a salary for yourself, your bankers and investors are going to recognise that you can’t continue to operate this way forever.
If the business can’t afford to pay you and still make a profit, then this probably is not a business that a bank or investor would be willing to put money into. Make sure to include a modest salary for yourself to demonstrate truly realistic financials.
“Forecasting future events is often like searching for a black cat in an unlit room, that may not even be there” Steve Davidson in The Crystal Ball.
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.
Entrepreneur Today1 week ago
3 Stealthy Tax Hikes Payroll Managers And Employees Need To Take Note Of
Entrepreneur Today2 weeks ago
SMEs: Staying On The Right Side Of The Taxman
Company Posts5 days ago
Executive Education Geared For Industry 4.0
Entrepreneur Today2 weeks ago
4 Dangers Of Business Under-insurance