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.
Backing You With Smarter Tools
Manage income, track expenses and do more with the ultimate toolkit for your small business.
You work too hard to work this hard. The good news is that you don’t have to break your back or the bank to run a successful business. Managing your business is easier when you’re using smarter tools with QuickBooks.
Since its launch over 20 years ago, QuickBooks has aimed to power prosperity for small businesses and the self-employed with services that help you with income management, expense tracking and more, allowing you to focus on growing your passion.
The new “Backing You” campaign extends this commitment to support small business owners through the challenges of business ownership – with a little help from Danny DeVito.
“The importance of small business is personal to me. At a young age, I watched both my parents and my sister build their own business from the ground up and struggle to balance family obligations with growing their businesses,” says DeVito.
“When Intuit QuickBooks approached me for this campaign, I felt this was a way that I could give back to this very important industry, show them how to make their lives easier and make them laugh along the way too.”
QuickBooks gives you a set of business tools that’ll do all the hard work for you, making sure you get the time to do what really matters to you. “Because collecting receipts is so 80s, and who has time to chase payments?” says Danny.
Positive Cash Flow And Smart Financing Solutions
When building a business, good cash flow is key to success. Linda Frohlich unpacks when you should get finance to grow your business.
“One of the best ways to solve working capital problems is to unlock cash flow within your own business. Evaluate your inventory cycle and whether you have stock sitting too long on shelves.”
The biggest challenge most business owners face is cash flow. A lack of cash flow stifles growth and can even lead to business failure.
When cash flow is tight, most business owners start looking for debt funding. While debt funding can be an excellent and effective growth tool, if accessed for the wrong reasons, it can actually do more harm than good, creating debt that business owners cannot afford.
Linda Frohlich, Executive Director at Sasfin, explains how you can unlock cash flow in your business and when it makes sense to access debt funding.
Understand your cash conversion cycle
A business’s cash conversion cycle is the length of time it takes a business to convert its investment in inventory and other resources into cash flow from sales. “Your cash is tied up in the production and sales process before you are paid by your customers,” explains Linda. “The shorter your cash conversion cycle, the healthier your cash flow and the greater your ability to pay your bills and suppliers without incurring penalties.”
Some business models have better cash conversion cycles than others. A business like Amazon, for example, whose cash conversion cycle in 2017 was negative 30,6 days, has an extremely good cash conversion cycle. The online retail giant ensures its inventory moves through the cycle quickly, and it collects cash from consumers before payments to suppliers are due. This means that Amazon has a lot of working capital and is able to invest in its own growth.
“One of the best ways to solve working capital problems is to unlock cash flow within your own business,” says Linda. “Evaluate your inventory cycle and whether you have stock sitting too long on shelves.”
It sounds simple, but many businesses do not manage their stock well, with the result that cash is sitting in goods rather than liquid in the business.
Another common problem that affects cash flow and working capital is overtrading. “One of the biggest issues we see are companies that overtrade and get themselves stuck in a debt cycle,” Linda explains.
“In simple terms, a business that is overtrading has orders, but not the infrastructure to meet those orders. If there’s a clear growth strategy in place matched with the right financing vehicles, this growth can be planned, controlled and executed, but many entrepreneurs want to run before they can walk.
“When this happens, the business will invest in expensive fixed assets to meet orders, and then the necessary orders don’t come in, or something happens to disrupt the business. Now the business is playing catch-up, and the business owner needs finance to cover debt.”
According to Linda, the biggest cause of overtrading is failing to plan cash flow. “This is one of the first questions we ask: Do you have a strategy in place and a cash flow projection, not just for this year, but this month, week, and even on a day-by-day basis?”
If you haven’t adequately planned your cash flow, you could be over-investing in growth or orders. “If you can see you’re in danger of overtrading, you can look for areas to cut costs and unlock cash flow in your business. Once you have overtraded however, it’s often too late and you end up in a debt-cycle you can’t afford.”
Another key error many business owners make is using the deposit from one contract to kick-start another contract. “There’s a domino effect when this happens. The business very quickly gets totally out of kilter, and the owner never quite manages to get on top of his finances. To avoid this trap, concentrate on finishing the job you have. Ensure that you allocate the funds that you get to where you lent the money from — no matter what.”
According to Linda, this is essential when managing cash flow. “Business owners often believe that funding a second project from the first (when it’s not finished and the money isn’t in the bank) will help them grow. Instead, it just kills their business.
“Cash is king and never borrowing money can cap your growth, but you need to understand the difference between healthy debt and bad debt.”
So, when is the right time to finance growth? “There’s a cost to accessing finance, which means it’s essential that you’re accessing it to help you grow your business, rather than to service debt,” says Linda. “If you borrow money to enable the growth of your business, the finance cost is actually part of the cost of your sales. But if it’s to service debt, or you can’t afford the finance, you’ve got a problem and it will only damage your business.”
According to Linda, it’s important to understand your margins. If you can sustain the cost of finance with your margins and if the finance product that you’re looking at makes sense for your business and growth plans, debt funding is a viable growth tool.
“The upside is that a financier can provide you with growth, because they’re going to give you access to cash, enabling you to grow your business. We think of it as a working capital solution rather than debt. We evaluate businesses and business owners to gain a deep understanding of the entrepreneur’s needs, first to ensure affordability and second to evaluate if the right product is being utilised to drive growth.”
According to Linda, business owners should always balance revenue to debt and income to profit. “If you aren’t managing your cash flow, it’s unlikely you will secure a loan from a bank. Banks want to fund growth and help entrepreneurs boost their businesses, not create more unaffordable debt for business owners.”
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