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Improve Your Financial IQ

Stop avoiding your numbers — there’s nothing to be afraid of and everything to gain.

Peri Pakroo

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Keeping careful track of your business’s finances is a must-do task to keep your business healthy. Nevertheless, a huge number of business owners neglect their numbers, and their businesses pay the price. There tend to be two main types of financial blow-offs:

  1. Fully neglecting to track income and expenses by letting receipts pile up (or get lost) and failing to enter data into a bookkeeping system.
  2. Doing a decent job of keeping income and expense records up to date, but failing to use the numbers to answer questions about the business’s financial situation.

While I’ve definitely known more than a few business owners guilty of the abject neglect described in item 1, the second type of financial ignorance is practically an epidemic among owners of growing businesses. Over and over I hear owners admit sheepishly, “I don’t do enough with the numbers.” If you merely keep up with the basics, you might avoid true financial disaster. But you’ll definitely miss opportunities to thrive if you don’t use your data to make strategic decisions.

Getting Over the Hump

If you’ve had your head in the sand about your business’s finances, take heart: You are not alone (by a long shot). Tons of successful business owners loathe dealing with numbers. They regard financial management with fear, anxiety, insecurity or some combination of the above. Typically, they say they are simply too busy running the business to deal with tracking income and expenses or analysing the numbers. Affordable bookkeeping software can be used to automate most of the work, from tracking account balances to generating sophisticated financial reports, putting essential financial information at your fingertips.

If you really hate working with numbers or truly don’t have the time to do so, have a competent employee or outside bookkeeper do the job. However, as the owner of the business and the person responsible for guiding it, you do need to be in the know about your business’s finances. So if you hire someone to do most of the financial management tasks, make sure you’re in the loop and that you understand what the numbers mean. Don’t be shy about asking for guidance or mentoring from an accountant or bookkeeper. If you feel insecure about your level of financial knowledge, you’re in good company. Just make a sustained effort to learn as you go.

Financial Management in a Nutshell

The trick with bookkeeping is to establish a system early to help you stay organised. This can be as simple as a process for organising your receipts and files, as well as having bookkeeping software set up and configured. With a system in place, you’ll definitely be able to handle most or all of your bookkeeping tasks, even if you’ve never done them before.
Financial management can be broken down into three broad steps:

  1. Keeping and organising records of expenses and income. Financial management starts with keeping records of all the money the business spends (expenses) and all the money it earns (income). This means carefully keeping and organising your receipts and expense records (such as bills from the office supply store, invoices from your web-hosting company, and receipts of payments to your employees and freelancers) and your income receipts (such as a cash register tape of your café’s income, cheque stubs from your client’s payment cheques, or your invoices to clients marked ’Paid‘).
  2. Entering this information into bookkeeping software. On some periodic basis — maybe monthly for a small consulting business and daily for a busy café or retail store — you’ll enter the information from your income and expense receipts into a bookkeeping system. More often than not, this will be some sort of financial management software.
  3. Generating financial reports. Finally, with up-to-date information entered into your bookkeeping system, you’ll generate reports such as a profit/loss report or cash-flow projection (described below) to reveal how your business is doing.

Doesn’t sound too bad, does it? Again, setting up a system will make a huge difference when it comes to entering and categorising data in your bookkeeping software. With your data entered, you’ll be all set to do the important (and actually quite fun) part of financial management: generating reports showing you the financial health (or illness) of your business. Generating reports is key to managing your business’s finances and making strategic decisions.

Financial reports summarise the data in your bookkeeping system to show you different aspects of your business’s financial situation. For example, a profit and loss report compares monthly income to monthly expenses to show whether your business is selling enough products or services to cover costs each month. A cash-flow projection shows similar information, but includes other sources of income such as capital contributions from owners or loans (that is, not just revenue from sales). It also organises the information slightly differently to show you whether the timing of your income is adequate to pay your bills on time.

The Payoff

By generating reports, you’ll be able to see trends and patterns in your business’s finances and identify profitable opportunities to pursue. You’ll also avoid letting your business simply drift along – or worse, run it into the ground. Here are just a few ways that analysing your financial reports will help your business:

  • You’ll be able to price goods and services more competitively, pace growth more effectively and trim costs strategically — for example, you might cut back on travel expenses or outsourced services that aren’t helping to generate sufficient income.
  • You may be able to reduce taxes by timing your purchases strategically and claiming all your deductible expenses — things that often escape businesses with disorganised records.
  • You’ll be able to manage your business’s cash flow, ensuring you can pay important bills on time. Cash flow management is a critical element in every business. When it’s done poorly or not at all, you may find yourself short of cash when it’s time to pay taxes, payroll or other crucial expenses. This is exactly the type of scenario that forces businesses to close up shop for good.

Peri Pakroo is the founder, Publisher and Editor of Pyragraph, an online creative career and lifestyle magazine. You can read more about her at her blog www.peripakroo.com.

Cash Flow

How You Can Make Your Unit Trusts Work For You

How investing in unit trusts can help you build your nest egg while remaining focused on your business.

Nadine Todd

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What should be an investor’s strategy when it comes to unit trusts?

Pieter Koekemoer:

A financial plan starts with clearly defining your objectives. It’s easier to get what you need when you know what you want. Unit trust funds are regulated investment vehicles that can meet the full range of investor needs. Once you know how long you want to invest, it becomes possible to narrow down to the appropriate set of options.

The key thing to get right is to take the level of risk appropriate to your needs. Taking on too much risk means that you may have less capital than expected when you need it. However, too little risk and you will eventually end up with much less capital than was possible. Generally, investors are well served with an investment in multi-asset funds (also called balanced funds) with a suitable risk budget.

These funds are diversified across all the asset classes and require less ongoing decision-making from the investor’s point of view and can be more responsive to a changing environment. This allows you to focus on building your business and getting on with your life while your nest egg accumulates over time.

Magdeleen Cornelissen:

South African investors are privileged to enjoy access to a vast number of unit trust funds, easily accessible via various investment platforms. The law of unintended consequences, however, can cause investors without a proper investment strategy to use inappropriate funds to address their needs. To ensure that a investor selects a suitable unit trust fund, the investment strategy should focus on the term of the investment, appetite for risk, as well as the possible future investment withdrawal requirements.

This could provide the investor with insight into the type of funds to include in the portfolio to ensure a desired future outcome. Investors must gain insight into the mandate of the funds considered, to ensure that the fund strategy is aligned with the investment strategy.

Dr Vladimir Nedeljkovic:

Investors today are exposed to a bewildering choice of unit trusts and other investment vehicles (ETFs, hedge funds, linked policies etc.), utilising different investment approaches (single manager, multi-manager, active, passive, smart beta…), and investing in various asset classes (equities, bonds, property, multi-asset/balanced). For non-professional investors, this choice may potentially prove paralysing.

One way to deal with this ‘paradox of choice’ (an observation that more choice often leads to sub-optimal decisions) is to focus not on the funds themselves, but on the actual needs motivating the investments. Every investor should, inter alia, reflect on the following questions: What am I investing for (a holiday, a car, my children’s education, retirement)? When will I need the money (is my investment horizon one year, five years, twenty years and so on)? How sensitive am I to investment losses (what is my risk profile? Am I prepared to risk ups and downs in my current investment returns for the potential higher returns in the future)? Only after answering these questions can the process of selecting the appropriate investment vehicles and strategies start.

Related: Equity or Property Unit Trusts?

How does this differ from other investment vehicles?

Magdeleen:

Each investment vehicle is associated with a unique set of rules. Before investing in any investment vehicle, it is important to understand the rules of the product. What stands out about a unit trust investment is the fact that the product is open-ended and that investors have access to their capital. In contrast to retirement investment products, no asset allocation restrictions apply, which makes the investment vehicle appropriate to address a vast number of investor needs.

Pieter:

Investor strategy is not defined by the vehicle used to implement the plan but by your needs. The primary benefits of investing in unit trusts over other options relate to transparency, investor-focused regulation and liquidity. All the fund managers offering unit trusts have to disclose detailed information about funds in a standardised and comparable format (think objectives, risks, approach, fees and past performance).

This information is always just a Google search away for all funds. Unit trust managers have a statutory duty to act with skill, care and diligence in the interests of their investors. If you want to change providers, you can do so at will, with your money back in your bank account in a couple of days, in nearly all cases without incurring direct exit or switching costs.

Vladimir:

Collective investment schemes (CIS) are investment products allowing multiple investors to pool their money into single portfolios. Long-only, standard unit trusts were the first CISs to be offered to investors in South Africa (today there are other collective investment schemes available, such as Exchange Traded Funds (ETFs), hedge funds, and so on). With collective investment schemes, each investor has a proportional stake in the CIS portfolio, based on his or her contributions. They are, therefore, suitable for investors who do not have the time, money or expertise to make direct investments into the market.

What research should an investor do before choosing the right unit trust investment for their investment goals and risk appetite?

investor-adviceVladimir:

When selecting their investments, investors often try to time the market and focus only on the funds with the best recent performance. This can lead to overall suboptimal investment performance. Research shows that due to reversion to mean, the best performing funds over one period are more likely to underperform over the next one. In contrast, investors should start with defining their desired investment outcomes (discretionary or compulsory, time horizon, return targets, risk appetite) and, in conjunction with a financial advisor, select the fund managers and funds that have the highest chance of satisfying those outcomes.

Pieter:

The textbook answer will be to define an investment strategy and then to evaluate the different implementation options by researching the 5Ps (philosophy, process, people, performance and price). This can be a tedious and time-consuming task, so many investors choose to delegate this decision to an advisor. Others short-hand the process by relying on well-known managers with a proven investment track record or alternatively to have no manager at all and putting their faith in the efficiency of markets by investing in a passive fund.

The key issue is finding a partner that you can trust to look after your interests in what is in essence a multi-decade undertaking with an uncertain outcome. As an aside, the debate between active and passive managers is fairly noisy and very public. It is important that you have a good filter to interpret the information you find online. Active managers try to beat the market, while passive managers attempt to replicate the market return. Both sides will point to the power of compounding to support their case. A difference of just more than 1% in the rate of return achieved can add up to 50% to the value of your capital at retirement. Passive managers will emphasise price as the key evaluation metric, while active managers will emphasise value (defined as the after-fee return received by the investor). At Coronation, we have a high conviction level that value will continue to trump price over the long term.

Related: The Truth About Unit Trusts

Magdeleen:

As a starting point, it is important to gain insight into the investment philosophy of the management team of the funds considered. Investors must understand the objectives of the funds. This would definitely require them to do some research on the fund manager considered. There are a number of risk measures that can be analysed. Be careful to not focus only on the ‘winners’ as historic performance is not always a true reflection of possible future outcomes. Spend some time to understand your own investor behaviour, specifically focusing on your tolerance for volatility, and your need for a certain outcome. Once you have done this, you will be one step closer to knowing which type of fund would suit your needs.

What should investors with a low appetite for risk consider?

Vladimir:

In general, such investors should consider money market funds or balanced funds with a lower percentage of equity holdings.

Pieter:

The most important question you should ask yourself is whether your risk appetite (your willingness to take risk) is aligned with your ability to take risk. If your investment portfolio is more conservative than is necessary, you are likely to incur a significant opportunity cost in the form of foregone returns. Investors who need both income and growth from their investment portfolio (i.e. most retirees) and investors wanting to fund near-term or medium-term commitments are the investors who typically face the most significant risk constraints.

Retirees need balanced portfolios with some form of downside protection against extreme market events, which would typically be described as medium or low equity balanced funds in the unit trust context. Investors with near-term objectives should consider managed income funds.

Magdeleen:

I am always tempted to have a conversation with risk-averse investors about the fact that shying away from assets perceived to be risky can actually cause them to increase the risk of not reaching their long-term goals. This is especially true after taking into account the effect of taxation and inflation. However, I have respect for the fact that not all investors feel it necessary to take on risk in an effort to generate additional alpha in their portfolio.

This type of investor will benefit from funds with a low-risk classification, consisting mainly of interest-bearing instruments. Care must be taken, even within the funds classified as low-risk, as there are instances where short-term shocks are still experienced within some of these funds, especially in the case of rapidly increasing interest rates.

What should investors with a high appetite for risk consider?

Magdeleen:

Be mindful of the investment term. I cannot emphasise this enough. Short-term investments should not include assets associated with volatility. If you have a high appetite for risk, give your investment portfolio sufficient time to digest the fluctuations in the value that can occur from time to time. In addition to this, I would also encourage investors to be mindful of the fact that the stock market is not a place in which we play with money. It requires knowledge, patience, and an ability to distinguish between the noise that occurs in the market from time to time and facts that actually play a role in the valuations of shares. Having a high appetite for risk is sometimes your biggest asset, but it can quickly turn into a liability if not managed correctly.

Related: Does a Retirement Annuity Make Financial Sense?

Pieter:

Take enough risk, ensure you diversify across local and international assets and stay the course despite temporary disappointment with investment outcomes. The past few years have been unusual, as equity markets delivered lower returns than expected. Losing faith in shares would be the wrong lesson to draw from this. Periods of weaker return typically coincide with fundamentals that are supportive of better future returns. Those that remain committed tend to do better over time as it is notoriously difficult to time markets. Also make sure that you maximise the tax breaks available to investors. Use your R33 000 annual tax-free investor allowance to invest in long-term growth funds, which will be described as high equity or flexible multi-asset funds.

Vladimir: Investors with a high-risk appetite tend to focus on equity funds, high equity balanced funds, as well as flexible funds and funds providing offshore exposure, depending on their circumstances. Such investors might start looking further afield, into RIHFs (retail investor hedge funds) and similar vehicles.

How much of an investor’s portfolio should typically be in unit trusts and why?

Pieter:

This depends on circumstances. Unit trusts are suitable as the sole investment structure for that portion of your balance sheet invested in listed assets. While entrepreneurs will always be tempted to go all-in to support their business ventures, it makes sense to diversify risk into a more diversified portfolio of investments. Creditor protection is also an important consideration. Holding your unit trusts via a retirement annuity fund may be a suitable response to this risk management need.

Vladimir:

This is difficult to answer without having a full picture of the circumstances of the investor, but that percentage is likely to be high, if one combines direct discretionary investment into the unit trusts with the indirect exposure via retirement vehicles.


This information is not advice, as defined in the Financial Advisory and Intermediary Services Act 37 of 2002. Collective investment schemes (unit trusts) are generally medium to long-term investments. The value of participatory interests (units) or the investment may go down as well as up. Past performance is not necessarily a guide to future performance. Collective investment schemes are traded at ruling prices and can engage in borrowing and scrip lending. The collective investment scheme may borrow up to 10% of the market value of the portfolio to bridge insufficient liquidity. The Managers do not provide any guarantee, either with respect to the capital or the return of a portfolio. Different classes of participatory interests may apply to portfolios and are subject to different fees and charges. Any forecasts and/or commentary in this document are not guaranteed to occur.

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Cash Flow

7 Things Every Entrepreneur Should Know About Managing Cash In The Business

Every entrepreneur needs to know how to prepare for cash, manage it effectively and mitigate fraud.

Chris Ogden

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Cash is complicated. It can’t be tracked properly, it opens up avenues for fraud, it gets stolen, and it is difficult to manage. It’s also an unfortunate reality that, in South Africa, cash payments and transactions are both inevitable and essential. So how can the entrepreneur overcome the challenges of handling cash? Here are seven ways…

1. Digitise

There are many ways to manage payments in the market today. You can Snapscan, you can Zapper, you can EFT and you can use an app to send money from a wallet to a mobile number. The problem is that none of these options recognise the fact that cash is still the leading method of payment in most markets. So, to really accommodate cash, the entrepreneur needs to look to digital solutions.

You can still physically collect cash, but digitise the transactional information so that you can easily identify the transaction and reconcile the cash collector.

Related: 5 Cash Management Tactics Small Businesses Use To Become Bigger Businesses

2. Protect the consumer

Ensuring that every cash transaction is tracked digitally means that you are protecting the consumer if the cash or transaction are lost. There is always the question – how can you service your customers post-payment without proof on your side? Ensure that your cash transactions are audited and accounted for to ensure you can recon accurately.

3. Don’t be a target

High collection points – those points where a lot of cash is collected and held – tend to become targets. Try to avoid putting your business in line of sight by using tools that can either limit the use of high collection points or that can alert the relevant security authorities if a theft occurs. Again, it comes down to digital tools to monitor, track and alert the right people at the right time.

4. Teach your customers

It’s one thing to invest into a bevy of tools and services to protect your transactions and consumers, another to let consumers make any number of silly mistakes. Teach your customers about fraud, potential risks, things to look out for and trust. They shouldn’t hand over their cash without the collector using the right tools or app and should be wary of any transaction that doesn’t have these protections built in.

Related: Improve Your Cash Flow: Manage Your VAT

5. Test and adapt

Invariably, those who want to commit fraud are equally committed to doing so. They will find loopholes and gaps that allow them to take advantage of you and your customers. Your best bet is to constantly test and adapt your systems, to build metrics in-house that measure inconsistencies and report back on any issues.

People are very creative and will find a way of helping themselves to cash that isn’t theirs.

6. Negotiate

Cash is expensive to manage so find ways of negotiating better deals with banks so you get the best fees. Cash-in-transit is expensive, but often necessary when it comes to large cash deposits.

7. Invest in a payment solution

Digital payment solutions aren’t always possible, but try to employ one that is easy to use and that can be gradually introduced to your customers. Adoption may be slow – it can take years to achieve low cash/high digital payments – but it will benefit you and your business in the long term.

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Cash Flow

5 Cash Management Tactics Small Businesses Use To Become Bigger Businesses

Reaching your highest potential as a business owner depends on maintaining positive cash flow.

Lisa Stevens

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You may have heard the phrase “Cash flow is the blood that keeps a business alive.” This couldn’t be truer, as consistent positive cash flow can help a business owner pay expenses, invest in new opportunities or grow a business.

Fortunately, as small-business-owner optimism remains high, most owners expect a healthy cash flow this year. The January 2018 Wells Fargo/Gallup Small Business Index found 77 percent of small-business owners rated their company’s cash flow as very good or somewhat good over the past 12 months, up from 73 percent in November 2017.

To help with managing cash flow, here are five tips you should consider:

1. Spread out your payments

Paying all your business bills at the same time rather than spreading them out can drain your disposable income and leave you at risk of not being able to pay your creditors and suppliers if an unexpected expense occurs.

Instead, try paying your bills closer to the due dates and negotiate with your vendors to see if you can extend your payables to 60 or 90 days.

Also, be sure to pay your most important bills, such as rent and payroll, before paying less important bills.

Related: 8 Ways to Avoid Cash Flow Surprises That Could Kill Your Business

Check with your vendor to see if you can receive discounts for paying any bills early. Remember to pay all your bills before the due date to maintain a good credit standing.

2. Collect payments quickly

Another way to improve cash flow is to incentivise customers to pay early by offering discounts.

Other techniques for collecting payments quickly include requiring deposits from your customers when taking orders and offering online payment options.

Thanks to advancements in technology, there are multiple ways for your customers to complete quick and efficient transactions with your business. One example is electronic billing, which allows for you to customize invoices and set up automatic payment reminders for customers.

credit-policy3. Establish a strict credit policy

It’s important to be wise about extending credit as a business. A non-paying customer can be a hefty expense to a small-business owner.

Establish a written set of standards for determining who is eligible for credit, and enforce those standards rigidly.

Also, be sure to require a credit check for all new customers before extending credit and monitor your accounts to identify late payers early so you can offer them a variety of payment options. These options might include a credit card charge or a payment plan.

4. Align your payroll cycle with your revenue stream

Some businesses, such as restaurants and retailers, generate daily revenue and can more easily cover the expense needed for weekly payroll.

Related: 5 Marketing Missteps That Make Cash Flow And Business Growth Stumble

For others, such as manufacturers, this could be a challenge, and you may benefit from paying employees less frequently, provided applicable wage laws allow you to do so. Refer to your state Department of Labor for pay frequency information.

5. Plan ahead for cash shortages

Expect the unexpected. Typically cash flow will vary, and unexpected expenses will occur even for established businesses.

Keeping a rainy day fund with three to six months of basic operating expenses in a reserve can prepare you for slow periods and emergencies.

Another option is to use a business credit card or business line of credit to pay for everyday expenses and help bridge gaps in cash flow.  Be sure to monitor your expenses with online banking and monthly statements.

Related: How Amazon Is Keeping It Lean

One important tool for planning ahead is a cash flow forecast, usually a one-year prediction of how cash will move in and out of the business. This helps business owners evaluate how profitable future sales will be, and provides an overview of what needs to be done to reach your goals.

In its simplest form, a cash flow forecast should show where cash balances will be at certain points in the future so you can anticipate and prevent cash shortages. To get started, organize your payables and receivables on a spreadsheet to see where money is coming and going.

Ultimately, reaching your highest potential as a business owner and being able to serve your customers effectively depends on maintaining positive cash flow. Following the tips above may help keep your business financially strong and position your company for success.

This article was originally posted here on Entrepreneur.com.

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