The bad news in the SME market in 2016 was that 67% of small businesses that closed in South Africa did so for financial reasons. This is a far more pressing problem for local entrepreneurs compared to their regional counterparts, with 50% more South African entrepreneurs discontinuing their businesses due to a lack of access to finance compared to the average for Africa. With this and the reality of SA having entered an economic downturn in June, it’s not hard to feel a bit bleak.
Darlene Menzies, CEO of Finfind, South Africa’s leading online access to finance solution, shares a few finance tips on optimizing your cash flow management to help ensure that your business survives and thrives during rocky times.
Ask for a deposit from your customers
One of the easiest ways of ensuring that you can cover the cost of doing the work for a customer is to ask them for a deposit before you start the work.
This is common business practice so don’t be afraid to try it. It’s acceptable to ask for up to 50% of the total cost as a deposit with the balance being paid at agreed delivered milestones or on final completion of the work.
Offer discounts for early payments by customers
Offering your customers a discount for paying earlier than the standard 30 day terms can help bridge your cash flow gaps as well as reduce the risk of late payments.
When cash is tight it makes sense to get slightly less money in immediately than to wait to get the full amount later. As a gauge, you can offer between 2.5% to 5% discount on payments received within 7 days from date of invoice.
Ask suppliers for better payment terms
Having extra time to pay suppliers can make a big difference to your cash flow – imagine paying 45, 60 or even 90 days from date of invoice instead of 30 days. If you have established a good payment history with your suppliers in months past and they see you as a valued customer then you should be able to negotiate better terms. It never hurts to ask!
Apply for accounts instead of paying cash
Many entrepreneurs pay cash for services they may be able to get on account – for example stationery, courier services, IT services or maybe car rental costs, if you do business travel. Paying for things monthly instead of using immediate cash helps with your liquidity and with cash flow planning.
Some entrepreneurs use pay-as-you go for their airtime and data purchases for their business – it’s worth investigating whether paying monthly for a contract works out cheaper.
If you’re a new business or don’t have a good trading history it may be better to apply for your contract in your personal capacity.
One way to get the services you need in your business without having to outlay hard cash is to swap services with other businesses. For example, if you provide accounting services you could offer to do the books for a small IT business in exchange for them helping you with your IT needs.
This kind of arrangement not only helps with cash flow but can also be a mutually beneficial way of gaining new customers if you both agree to refer each other’s services.
When you’re in a cash jam an easy way to fund urgent business purchases is using a credit card, either your personal or business card. The upside of using a credit card is that you only have to make small monthly repayments but the downside is the additional interest rates charged if you don’t pay it off quickly.
Apply for an overdraft facility
Banks offer overdraft facilities on your personal and business accounts. Getting an overdraft approved means that the bank allows you to continue withdrawing money from your account when you balance is zero. Apply for an overdraft even if you don’t currently need it as it could be a lifeline if you suddenly find yourself in a tight position cash flow wise.
Some banks now charge a small monthly fee for these facilities even if you don’t use them, but this is a small price to pay for the convenience of being able to meet unexpected financial challenges.
Get a loan for outstanding invoices
There are lenders who will give you money while waiting for customers to pay your invoices. This is a good option if your cash crunch is caused by customers who take a long time to pay.
These lenders typically only consider lending if your customer is a corporate or Blue Chip company and of course the work has to be completed and invoiced. In this type of finance the lender looks at your customer’s credit history and ability to pay in deciding whether to approve the finance.
On average you can raise between 75% and 80% of the value of the invoice within a day or two of sending the invoice to your customer. There is usually an administrative fee to be paid plus interest on the loan – it can be an expensive way of getting finance but it is better than waiting 90 or 120 days for your customer to pay you if you have cash flow constraints.
As a small business owner you will know how true the old adage is that says ‘revenue is vanity, profit is sanity but cash flow is reality’. Month end comes around fast and they can be scary times – managing your cash flow well is not only critical to your business’s survival and growth but can also help to give you better peace of mind.
Financial Literacy Key To Business Success – Especially In A Tough Economy
What can South African SMMEs do to position themselves for success in tough economic times? Arming their people with basic financial literacy is a good place to start argues UCT Graduate School of Business Associate Professor Mark Graham.
In times of economic hardship, good financial and management skills in a business can make all the difference. According to a recent article in Business Day, international investors are sniffing about South African SMMEs that have proven themselves to be well-run during this time of subdued economic growth – and are also attractively undervalued.
Strong balance sheets and stable management in an environment of slow growth economy with low liquidity adds up to some bargain long-term investment opportunities for international consortiums it seems. Among those who have been involved in investment or buyout offers in the past few months are Clover and Interwaste.
It seems self-evident to suggest that well-run businesses attract investment and success. But what actually makes a business – of any size – well-run in the first place?
There is obviously no short answer to this; good leadership, a clear strategy and a strong and motivated workforce all play their part, but one factor that is often overlooked is financial acumen – throughout the organisation. While the accountants and members in the finance team are expected to understand the numbers, this is not always a core competency required in other departments. Yet, having a good working knowledge of finance at every decision-making level, from new managers to members of the board, can be key.
Even if people don’t need to know a lot about finance in their day-to-day job, the more conversant they are on the subject, the better off they – and the business – will be, according to Richard Ruback, a professor at Harvard Business School and the co-author of the HBR Guide to Buying a Small Business. “If you can speak the language of money, you will be more successful,” he says simply.
Financial savvy will give the marketing manager the ability to demonstrate not only that something is a good idea/product or service, but that it makes financial sense too, for example. And it will make sure that the people in the HR team understand more clearly why reducing staff churn is a good idea not only for company culture but for the bottom line as well.
A knowledge of some basic financial decision-making tools (the all-important balance-sheet, for example) and an appreciation of the difference between profitability and cash flow will ensure that non-financial managers are more likely to effectively participate in business strategy and decision-making. Someone who understands the financial statements of a business understands the business in a way that is not otherwise possible. It’s like looking beneath the hood of a car and understanding how it all fits together and why the car can move forward – or not.
Such people can more confidently identify potential problems and inefficiencies before they impact the overall financial performance, because those warnings are almost invariably reflected in the financials first – and often at departmental level. Critically, they can also help identify financial irregularities, enabling them to call out and stop fraud and corruption in its tracks.
Equipping its people with financial skills is therefore a good strategy for a business looking to position itself for growth and investment. And it makes sense for individuals too – Joe Knight, a partner and senior consultant at the Business Literacy Institute in the US and the co-author of Financial Intelligence, says that an absence of financial savvy is “career-limiting.”
Let’s not ignore the fact that there are challenges however. Finance matters tend to scare a great many people. Traditionally, these areas of knowledge carry the stigma of being impenetrable, and financial literacy is not ideally developed at early levels. According to a study by the Financial Services Board, South Africa currently has a financial literacy rate of just 51%.
This means that roughly one out of every two people is likely to prefer to abdicate from financial decision-making – leaving it to the “numbers” people. But with some intervention and training it is possible to empower individuals to decode these mysteries and get to grips with the language of finance.
All things being equal, it’s not pure luck that allows some businesses to operate well and thrive while others fail. Well-run businesses are generally run by well-informed people. In short, decision-makers who don’t understand basic financial concepts and the language of finance simply don’t know what is going on.
While the SA government is currently talking up the need for foreign direct investment to rescue the country from the economic doldrums, there is much that ordinary businesses can do to position themselves for success. And ensuring that their people are adequately equipped to understand the nuances of business through the language of finance is perhaps a good place to start.
Trade Agreement Tips That Will Save You Costs
If you are looking to benefit from trade agreements, you need to keep the following advice in mind.
Trade benefits all parties involved. When a country has scarcity of certain resources or lack the capacity to satisfy their own needs, they have the opportunity to trade the resources which they produce in surplus, for the products they need or want.
When goods are transferred from one country to another, it stimulates the economy as products and money is switched between hands. Over the years, the competitive nature of moving goods from one country to the other, negotiating prices and opening new markets has caused certain agreements to immerge to promote trade between the member countries.
A trade agreement is an arrangement between two or more nations in order for goods to move more easily between borders with mutually beneficial tariffs imposed on imports. These agreements ensure that duty tax is removed or reduced on condition that the importer and exporter provide the correct documents. This is all the more reason for traders to familiarise themselves with the current trade agreements in place.
Tip1# Know Whether You Export To Or Import From A Country With A Trade Agreement
There are a few trade agreements that you need to be aware of which will significantly cut duty tax. The Southern Africa Development Community (SADC) Free Trade Agreement (FTA) is one of them. The fifteen SADC member states included in the agreement enjoy an impressive 85% free trade on goods.
Another trade agreement commonly used by South Africans is the South African Customs Union (SACU) which allows duty tax free movements of goods. This means zero duty tax is payable on trade between these countries. Trade agreements with European countries include the SADC-EU Economic Partnership Agreement (EPA) and the SACU European Free Trade Association (EFTA). We have prepared a list of all the trade agreements as well as the countries involved here.
Tip 2# Know Which Certificate Of Origin Is Necessary For The Specific Trade Agreement
Only traders who can prove that goods were produced or processed in a member country may benefit from these agreements. This is why importers and exporters need to submit paperwork attesting that the goods were made in the country listed as the beneficiary of the trade agreement. The proof provided is called a ’Certificate of Origin’.
A certificate of origin often abbreviated to C/O or CoO is a printed form or electronic document completed by the exporter and certified by a recognised issuing body, validating that the goods in a particular export shipment have been produced, manufactured or processed in a particular country.
The exporter has to submit proof that either a) the products were wholly obtained from that country; this means all components and manufacturing originated in that country, or b) that it is sufficiently processed in the country of origin.
In other words, although some components might have been imported, the product was sufficiently transformed, or value was added in such a way that the final item can be deemed as new or original. Furthermore, if a company was registered in one country and the manufacturing plant in another, the certificate of origin would be issued from the manufacturing plant’s country. There are various certificates of origins used for different countries. Read here for more details about the different documents required to ensure you benefit from lower duty tax.
#Tip 3: Ensure The Certificate Of Origin Is Completed In The Right Manner
These documents must be completed correctly. Most of the information provided has to come from the exporter. If the wrong information has been reported, it can influence the relationship between the importer and exporter negatively.
Common mistakes when filling out a Certificate of Origin may include:
- Identifying the wrong country of origin
- Using the wrong H.S. code
- Providing an incorrect or incomplete and rather ambiguous description of the goods
- Not including a description on how the cargo is packed or reporting a total weight that does not include packaging
- Exporting goods made from imported material and not sufficiently processed to be deemed as originating from the exporting country.
A lot of information can be misrepresented on the certificate of origin. For this reason, we recommend making use of companies specialising in trade administration to ease the stress and to ensure that all the t’s are crossed and i’s are dotted.
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