As a start-up business, chances are your cash flow is tight and you haven’t managed to secure financing. Don’t worry, you’re not alone. In fact, these are the biggest challenges most start-ups face: how do I manage my cash flow and get customers to pay on time? And how do I access funding?
The reality is that most banks will not lend to a start-up within its first three years — the risk is simply too high. This is hardly unique to South Africa, but rather a global phenomenon. That said, Clive Pintusewitz, director: small enterprise and enterprise development at Standard Bank, admits that there is more that banks can do to assist the start-up market.
“It’s a delicate balance,” he says. “On the one hand, many start-ups simply do not have the financial acumen to manage their finances well enough to mitigate the risk banks take lending them money. On the other hand, I firmly believe there is more that we can do to facilitate lending to start-ups and SMEs.”
In order to close this gap however, it is essential for start-ups to improve their financial management skills. Forecasting and cash flow are essential. If a business owner can prove their model will work, and show they have an intimate knowledge and understanding of their business and its finances, they immediately reduce the risk of lending them money.
Mitigating business risk
“Every business will have cash flow gaps in its first 12 months,” says Pintusewitz. “This is inevitable. However, it is possible to forecast where those gaps will be. If a business owner does that, the business loan is still risky, but it’s predictable. Often we are only approached after problems have manifested themselves, which is an immediate red flag for us. The fact that the gaps occurred isn’t the issue, but rather that the business owner did not have enough of a handle on events to predict the gap earlier and therefore make provision for it.” (See case study on page 69 for an example of cash flow forecasting).
Accurately forecasting cash flow issues is not only useful for securing finance however. Good business and financial management will ultimately lead to growth — whether or not the business secures finance.
Pintusewitz offers ten key areas that start-ups should focus on for healthy cash flow.
- Don’t spend ahead of revenue
”This sounds obvious but we see businesses doing all sorts of things. For example, start-ups often believe that they need to create a professional image, and so they take 200 metres of A-grade space in Sandton, get locked into a two year lease, and then aren’t able to pay their rent because the contracts haven’t flown in as expected. It’s a death knell for a start-up. Flexibility is vital.“
- Get your revenue in and bank it
There is no substitute for this. Manage your debtors from the first contract you get. Make sure your clients pay you properly.
- It’s about control
“We always say retail is detail, but this is true of any business – you need to know exactly what is happening in your business: your stock; your staff; money in the bank and money owed you; who you owe; what you will gain by paying your suppliers at different times etc.”
- Understand your market
What are your risks? In other words, do you stock perishable goods? Is your business power hungry? What happens if the lights go out? Do you rely on trends? You need to know your market to manage your business properly.
- Check your finances regularly
How can you coincide when you are paid and when you pay? The closer you can get those two working together, the better off you will be, and the more positive your cash flow.
- Understand gross versus net profit. You get goods, you mark them up, but you don’t take all your own costs into account, and by the time you have taken everything into account, you are actually losing money.
- Don’t rely on a few big contracts
If one of those contracts doesn’t pay you on time, can you survive? It might be more prudent to turn down a big contract in favour of a few, less lucrative contracts. It might be a
R1 million opportunity, but what happens if they can’t pay? Perhaps you should rather only take R200 000 of the contract, and spread your risk across other smaller contracts. Very few entrepreneurs manage this well — they see the bright lights and go for it, without managing the risk.
- Do due diligence on potential clients
Don’t just take a business at face value. Investigate its credit record through a bureau like Experian or Transunion, and speak to other clients to find out what they are like to work with, and whether they pay on time. A bad client can kill a start-up.
- Don’t overtrade
Many start-ups grow faster than their cash flow can support. Your profit is going up, but profitability is going down because your expenses are higher than revenue. Before you make the decision to invest in growth make sure the resultant revenue is greater than the costs. If it isn’t, wait.
- Make sure you see the full picture
You do need to grow, but understand how the growth will affect you — and then you will be able to grow at the appropriate times. Don’t assume that the revenue generated from growth will cover the additional costs.
It’s important to understand risks and make educated decisions. Cash flow is vital to a start-up’s survival, and healthy cash flow can only be achieved through an intimate understanding of your business and your market. n
Positive Cash Flow
Pizzaz is a small owner-run events management company. The company enjoys relatively steady business throughout the year, although November and December are busy months, and January is quiet. On average, they collect 50% of their revenue in the month of the event, 30% the month after, and the balance two months after the event.
Revenue in September was R120 000, October R110 000, November R150 000, December R250 000 and January R50 000.
The cost of materials and décor for events is 40% of the amount charged and paid on the day of each event, monthly rent costs R5 000, cell phone bills R3 800, and salaries R85 000. 10% bonuses are paid in December.
Because January is such a quiet month, the owners use the time to upskill their employees and send them on training courses. This is projected to cost R15 000.
Here is a brief example of their cash flow projections in the months November through January. They had R25 000 in the bank at the beginning of November.*
By the end of January, Pizzaz’s cash flow is in the negative. With adequate planning and risk management, the situation can be controlled and planned for.
Standard Bank launched BizLaunch in April. Through this innovative new product, the bank is extending a strong hand of support to start-up businesses with a package that will help ensure the correct basics are in place from the word go, reducing the potential rate of failure.
BizLaunch offers the critical things businesses need to get started:
- A R90 per month (R3 per day) business account, which allows holders unlimited electronic transactions, unlimited debit orders, unlimited cheque card swipes, Internet banking, My Updates (SMS notifications); and eight ATM cash withdrawals. This excludes branch transactions.
- My Business Online, an accounting package from Pastel, the market leader in accounting software.
- Businesses have access to a Business Banker to discuss and meet their needs.
- Free packaged business support and tips on how to start and grow a business.
Why we love it
As a one-stop shop, full-service offering that includes a very affordable business account with no hidden costs; an accounting solution; an affordable insurance offer, and access to expert advice and other support, BizLaunch is a proactive product that assists start-ups to lay the right foundations for business success. The tool aims to give entrepreneurs a sense of the financial position of their business.
While the bank acknowledges that there are no silver bullets when it comes to starting a business, but that it takes hard work and persistence to succeed, Bizlaunch offers relevant practical solutions.
Go to bizconnect.standardbank.co.za for more information.
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.
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.
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