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Why You Could Be Making the Wrong Fiscal Assumptions

Here is a list of the most common fiscal assumptions made when compiling a Financial Projections Model.

Dr. Thommie Burger

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“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

Related: (Slideshow) Using Your Business Plan to Monitor Progress

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.

Related: 5 Telling Tests to Prove If Your Business Plan Works (Or Not)

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.

Founder of JTB Consulting, a leading Business Plan Consultancy that provides practical, unique and affordable Business Consulting and Business Plan Solutions to entrepreneurs, start-up businesses and existing companies. Founder of Animazing, a Marketing Agency that designs unique animated videos; a communication and marketing medium clients use to deliver their messages in an effective, engaging and memorable way. Thommie is a Summa Cum Laude MBA Graduate and holds a PhD in Entrepreneurship and Business Management.

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Budgeting

4 Ways To Improve Your Budgeting Skills

Increasing revenue isn’t solely dependent on how much money your business is making but also relies heavily on how well you manage it.

Josh Althuser

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Traditional budgeting methods have undergone a digital makeover in recent years, and now offer businesses an abundance of streamlined services, tools and access to experts that will help improve your budgeting skills. From regulating current expenses to applying for funding, a well-crafted budget is an essential part of developing a healthy financial forecast for any business.

1. Take advantage of budgeting software

Creating an effective business budget will require a bit more than just utilizing a personal financing software. Luckily, there are plenty of tools available that focus on helping you get your professional finances in order. Centage, which came out in 2001, is a powerful portal that gives companies the chance to streamline their budgeting, while also providing forecasting and consolidation features to help you create more strategic budgeting plans. Investing in a budgeting software is a great way to stay organized at any stage of your professional development.

2. You can’t predict the future, but you can prepare for it

In addition to making the most of the available budgeting tools on the market today, it also pays to do your research. Understanding market fluctuations, as well as competitor activity, will help you create a clear budget plan based on these variables. Keeping up to date on the changes that tend to happen frequently within your industry will also grant your business a bit of extra confidence when it comes to making future decisions. Budgets can provide a strong financial forecast help businesses adapt quickly to changes that might have set them back in the past. For example, if your product is largely dependent on seasonal trends, these projections will give you a greater sense of which months you will be seeing more revenue, allowing you to allocate these funds accordingly throughout the year.

Related: It’s Vital To Your Business Success: How To Manage Your Budget Better

3. Ask an expert

Creating an effective budget for your business goes way beyond simply organizing your finances. Reaching out to an expert to help you construct a budget that fits both your personal and industry needs can better schematize your current plan, and potentially make your business model more profitable.

The rapid growth of the freelance economy has resulted in the creation of platforms that give businesses, big and small, access to a wealth of skilled finance professionals. Whether you’re in the market for a quick consulting session, or on the lookout for a long-term advisor, speaking with someone who specializes in creating budgets for business is a great way to gain valuable insight on the best ways to handle your finances. 

4. Don’t forget about funding

Access to funding is an important resource for any business, especially those that are in the early growth stages. Whether you are starting out small with a modest self-investment, asking friends and family for a bit of help, or preparing to pitch a big name investor, having a financial forecast in place is a must.

For those that are hoping to get their hands on VC funding, presenting current activity and future financial projections is an essential part of the process. Of course, investors understand that budgets are subject to change, but without a financial plan in place, investors may question whether or not your business is a worthwhile investment. A clearly constructed budget can help illustrate the value of your company, in addition to showing what will be done with supplementary funding to increase growth.

Related: 7 Ways To Be Debt Free For The Rest Of Your Life

For small and big businesses alike, an agile and well-crafted budget is key when it comes to maintaining and improving your company finances. From managing the day to day expenses to preparing for unexpected changes in the market, getting into the habit of good budgeting is the best way to ensure steady growth for your company.

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Budgeting

It’s Vital To Your Business Success: How To Manage Your Budget Better

Should I take budgeting seriously, and what can it do for me?

Ed Hatton

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A budget is or should be a part of your business plan. It is one of the major control methods to make sure your plan is implemented rather than ignored.

I agree that there are some very successful businesses that operate on a seat-of-the-pants basis, but there are a lot more trying to do so but instead floundering around in the dark.

Unless you are gifted with unerring judgement and great insight you are likely to achieve more success by working to a plan and budget.

Budgets are often prepared by financial managers and tend to focus on operating and capital expenditure rather than sales, purchases, inventory and debtors targets. A better approach is to start by agreeing what performance your company would like to achieve for all key areas.

Related: 6 Simple Ways To Build Brand Credibility On A Tight Budget

The sales budget could be a separate section of the main budget to manage expected sales by whatever breakdown suits your business: Type of product, by division, branch or sales channel, or type of customer. In each category budget for margins, discounts and commissions.

Correctly managing your expenses

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Key expense items like payroll, overtime, marketing promotions, travel, vehicle expenses and IT costs should be planned for and monitored via the budget but I suggest you don’t clutter the expense budget with too many items which you have little power to manage.

Rather lump these together, you can always drill down if the costs get out of hand. If you have a seasonal business with variations in sales and expenses depending on the time of the year, make individual budgets per month.

Do not forget balance sheet lines, especially capital expenses for new buildings, machinery or vehicles, and also borrowings and other liabilities.

Related: 5 Budget Pitfalls To Avoid In Your Business

Debtors, creditors and inventory should all be planned and monitored and it is a good idea to monitor measures like average days outstanding for debtors and creditors, days inventory held, bad debts and obsolete or lost stock.

The last items can be target ratios which may not form part of the budget, but should be reported on regularly so that you do not get nasty surprises at the year end. Prepare the budget with everyone concerned to get buy-in. The budget becomes an agreed plan of operations to which everyone is committed.

Continuously review your budget

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Monitoring performance against budget should be done at least quarterly, but I prefer once per month in a management meeting. If you are the only manager, set aside time each month for a vital review your performance against budget.

The actual results must be up to date and available. Use a simple spreadsheet showing budget, actual and variance or a dashboard which shows key metrics as graphics or tables.

Examine those items where the variance to budget is significant and probe for reasons. The dangerous ones are the start of a trend — for example sales in one area consistently below budget or mushrooming overtime costs.

For any bad variances that are not just a short-term hiccup you should plan to correct the problem, or if the problem is insurmountable, replan to get around it.

Course correct your budget as you grow

The budget can be changed because circumstances are different to those envisaged when the budget was prepared, but a better option is to add another column for a revised budget, so the amount of the change remains obvious.

Related: 7 Creative Strategies For Marketing Your Start-up On A Tight Budget

Managing the budget should not be limited to complaining about excessive entertainment or travel costs, but a vital tool to give stark visibility to key areas of the business that are not performing as expected.

It should involve all the key players in decision-making to catch and fix problems early, but also to seize opportunities presented by better-than-expected performance at the earliest time.

Treat budgeting as a management tool and it is likely to treat you to more profit and less nasty surprises.

Do this

An excellent way to increase profits is to treat budgeting as a management tool. Never be scared of your budget — use it instead.

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Budgeting

#Budget2017: 5 Areas Where Businesses Are Seeking Clarity From The 2017 Budget Speech

Here are a few other points I hope Minister Gordhan will clear up in his Budget Speech this year.

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Yolandi Esterhuizen, Compliance Manager at Sage, on a few points that she hopes Minister Gordhan will clear up in his Budget Speech this year.

We’ll all be watching Finance Minister, Pravin Gordhan, closely on 22 February when he will present his Budget for the 2017/8 tax year.

With a revenue shortfall of around R28 billion to plug and slow economic growth, he is expected to announce some tough tax measures to ensure government has enough money in its coffers to meet its objectives.

Compulsory annuitisation of provident funds

provident-funds

Members of retirement funds and payroll administrators alike would like to see clarity around this long outstanding issue. At the moment, provident fund members may take all of their retirement savings as a lump sum upon retirement.

Government wishes to align provident funds with pension funds and retirement annuities – with these classes of retirement funding, members must reinvest their retirement pay-out into a vehicle that will pay them annuities each month.

Related: Budgeting Basics

In January last year, Government announced that compulsory annuitisation of provident funds would take effect from 2018. However, provident fund members started to enjoy a tax deduction on their contributions from March 2016.

Government said last year that it would review the tax benefit for provident fund members to achieve fairness between all retirement funds if an agreement is not reached within two years. Removing the deduction would cause a decrease in the net pay of many individuals who pay into provident funds.

Post-school education

budget-speech-2017-university-education

The #feesmustfall movement has yet to lose momentum and funding for tertiary education remains high on the agenda. We may hear more about how government will incentivise businesses to help employees pay for their children’s university education through loans or bursaries going forward, given the pressure to help youngsters pay for their education.

The Taxation Laws Amendment Act, 2016 promulgated on 19 January 2017 provides for an increase in the amounts which are exempt in terms of bursaries provided to employees’ relatives.

If an employee earns more than R400 000 a year, the full bursary is taxable. R400 000 or less, a portion of the bursary is exempt.

Related: Budgeting Mistakes

National minimum wage

minimum-wage

The National Minimum Wage Panel Report last year recommended that government sets a minimum wage of R3,500 per month for full-time workers, or R800 per week, or R20 per hour.

This follows extensive consultation between government, business and labour, with the aim of setting a wage that reduces poverty and inequality. It seems that the National Minimum Wage may be implemented sooner than many of us expected.

The devil will be in the detail. Will there be any regional or sectorial exclusions? How long will business have to phase in the new minimum wage?

Government knows that there is a balance between setting the minimum wage that will have positive impact on inequality without affecting job creation, undermining the sustainability of the country’s enterprises or triggering high inflation.

National health insurance

national-health-insurance

The White Paper on National Health Insurance (NHI) was published for comment on 11 December 2015. Though pilots are underway for the NHI, there isn’t much clarity about how it will be funded. A payroll tax is one option government has put on the table, but a VAT increase is also an option.

NHI is being implemented in phases over a 14-year period that started in 2012, but most stakeholders are anxious to get clarity about the funding model. Hopefully, Minister Gordhan will provide some insight in his Speech.

Related: 5 Budget Pitfalls To Avoid In Your Business

Additional revenue?

It is yet to be seen whether the Minister will opt for new taxes in the vein of carbon and sugar taxes announced in recent years, hike personal or company taxes, or increase the VAT rate.

We have long speculated that government may add an additional income tax bracket for high income earners, or look at wealth taxes in its search for new revenue and its quest to reduce inequality.

Millions of entrepreneurs in the world’s Small & Medium Businesses trust Sage as they power the global economy.  We will be waiting to see how the Budget will affect payrolls and accounting so that our customers will be ready for any new rules and regulations the government introduces.

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