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Financial Management

What should I know about creditor and debtors department or function?

The National Credit Act has established guidelines for dealing with delinquent debtors, but you have to work through a credit bureau.




Credit & Debit Basics

What are Creditors and Debtors?

Creditors are the people to whom we owe money for goods and services supplied by them to us on credit.
A debtor is a person or entity that owes an amount of money.

What is the difference between accounts payable and accounts receivable?

The definition of accounts receivable is the money due from all customers for merchandise or services delivered on credit. The total figure would be shown on the balance sheet as an asset.

If you plan to sell goods or services on account in your business, you’ll need a method of tracking who owes you how much and when it’s due. Here are five key components of a good accounts receivable system:

  • Verify accounts receivable balances. Use source documents such as invoices to keep balances accurate.
  • Send accurate and timely invoices. You won’t get paid until you send an accurate invoice.
  • Generate accounts receivable reports. This will help determine which customers are past due and help you track credit limits.
  • Post the paid invoices. It’s important to track who pays you when.
  • Match your records. Your customer records totals must match your general ledger and sub ledgers.

Need Credit?

What is trade credit?

For many businesses, trade credit is an essential tool for financing growth. Trade credit is the credit extended to you by suppliers who let you buy now and pay later. Any time you take delivery of materials, equipment or other valuables without paying cash on the spot, you’re using trade credit.

How to use trade credit

When you’re first starting your business, however, suppliers are most likely not going to offer you trade credit. They are going to want to make every order COD (cash or cheque on delivery) or paid by credit card in advance until you have established that you can pay your bills on time. While this is a fairly normal practice, you can still try and negotiate trade credit with suppliers. One of the things that will help you in these negotiations is a properly prepared financial plan.

When you visit your supplier to set up your order during your start-up period, ask to speak directly to the owner of the business if it’s a small company.

If it’s a larger business, ask to speak to the CFO or any other person who approves credit. Introduce yourself. Show the officer the financial plan you have prepared. Tell the owner or financial officer about your business, and explain that you need to get your first orders on credit in order to launch your venture.

Terms around trade credit

Depending on the terms available from your suppliers, the cost of trade credit can be quite high. For example, assume you make a purchase from a supplier who decides to extend credit to you. The terms the supplier offers you are two percent cash discount with 10 days and a net date of 30 days.

Essentially, the supplier is saying that if you pay within 10 days, the purchase price will be discounted by two percent. On the other hand, by forfeiting the two percent discount, you’re able to use your money for 20 more days.

On an annualised basis, this is actually costing you 36 % of the total cost of the items you are purchasing from this supplier! (360 divided by 20 days = 18 times per year without discount); 18 x 2 percent discount = 36 percent discount missed.)

Cash discounts

Cash discounts aren’t the only factor you have to consider in the equation. There are also late-payment or delinquency penalties should you extend payment beyond the agreed-upon terms. These can usually run between one and two percent on a monthly basis. If you miss your net payment date for an entire year, that can cost you as much as 12 to 24 percent in penalty interest.
Effective use of trade credit requires intelligent planning to avoid unnecessary costs through forfeiture of cash discounts or the incurring of delinquency penalties. But every business should take full advantage of trade that is available without additional cost in order to reduce its need for capital from other sources.

Want to Extend Credit?

How to extend credit to customers

Working with big companies means you are working for clients who generally have a great deal of “red tape” to go through when outsourcing jobs to other companies. This can cause a situation that boils down to lots of paperwork and confused communication. Slow and late paying clients can drain your resources and are a major source of frustration.

Check Credit Ratings

Before agreeing to provide any services, check out the credit rating the company, before doing business with them. The credit report will highlight trends in your prospect’s payment history.

This information will assist you in determining the payment terms. For instance, if the prospect has a particularly bad credit score, you should only undertake work from them on a payment upfront basis. TransUnion or Experian will be able to supply you with a credit report.

Implement an order system and stick to it

Follow these steps in order to ensure a smooth working process when you agree to provide services for a new company.

  1. Provide a quotation: When working out a quote for services you provide, you need to know exactly how much time the job will take and precisely what your time is worth.  Keep accurate and detailed records of the time you spend on various tasks. It might seem like a hassle at first, but quickly becomes part of your normal routine. Follow good customer service principles and deliver your quotes when you promise you will
  2. Once the quote has been accepted issue a job order: The job order must be signed by the person in charge before work can proceed. Be prepared to discuss details of the job order and make yourself available to do so. Always make any amendments in writing.
  3. When the work is complete and the client satisfied, an invoice can be issued to the client

What is a Job Order?

A signed job order reflects both sides’ agreement about the work that is to be provided. If you don’t perform the work, the other side need not pay you. If you perform work, according to the specifications of the job order, you will be able to issue an invoice and receive payment.

The work order should include payment provisions and all the necessary terms and conditions. For an order to be legally binding it must be signed by the company that is contracting the work from your company.

Contracts: Terms and Conditions

Make sure that the terms and conditions appear on the order form and the invoice spells out the grace period within which a client make payment after the invoicing date. The standard practice is 30 days, but you can determine this according to your needs. Also explain that interest will be charged for late payments.

You could also consider a discount for COD payments. This will give incentive to your clients to pay their invoices sooner rather than later. Most clients will act in good faith, so keep an open mind, and be willing to negotiate in instances where there is disagreement. However, by explicitly setting the terms in advance, potential disputes can be avoided and you can focus on what’s most important – doing great work.

Dealing with Non-Payment

Getting paid

Send reminders via email or fax to the contractor for payment. If you have had no response from the reminders, then you must send a final demand. You usually send three reminders. Keep copies and proof that these have been sent and received by the party that owes you money.

Even after you’ve sent a number of statements and reminder notices, some customers will continue to ignore you. This is the time to hire outside collection agencies, which will use stern and firmer methods such as listing them with credit bureaus. Many customers fear damaging their credit rating, so the simple act of being contacted by an external third party is often enough to worry many customers into action and to pay you.

What does the contract say?

“So much depends on the agreement between yourselves and the contractors. Was the service provided on a cash payment or did you agree to accept payment in 30 days? It’s hard to comment without understanding the terms of payment and what was agreed to within the contract,” says Cheryl Burns, Marketing Manager, Lombard’s Insurance.


In order to avoid similar situations in the future, you can take few steps.

Before you agree to do any work for a company, do a credit check and ensure that they are in a position to pay you. Consider investing in Trade Credit Insurance also known as business credit insurance. Trade credit insurance usually covers a portfolio of buyers (debtor’s book) and pays an agreed percentage of an invoice or receivable that remains unpaid because of protracted default, insolvency, or bankruptcy.

How to handle bad payers

The National Credit Act has established guidelines for dealing with delinquent debtors, but you have to work through a credit bureau.

List the defaulting debtor

You can use list a defaulting debtor with a Credit Bureau so that details of their debt appear as an “adverse listing” in the national credit databases. But this must be done in strict accordance with the terms set out in the National Credit Act.

The process

Once you have completed the collection process and have had little success, you have little choice but to list them. If you decide to list a defaulting debtor, the first step is to notify them in writing that they will be listed. “They have 20 days in which to respond”, explains Ethel Titus of Experian. “If they don’t respond to the registered letter, then contact either Experian or TransUnion or both, and request an Adverse Form”, advises Titus.

Free listing

The Adverse Form must be completed and returned to the credit bureau that will in turn check if the delinquent company is already listed. If some form of information on that company does reflect on the credit bureau’s records, they will attach your adverse listing to that report free of charge.

Create a file

“If the delinquent company has not yet been listed then the procedure is different”, says Titus. “You have to contact a business consultant at a credit bureau and arrange to create a file for the defaulting company. There is a fee to do this and once paid, the delinquent company will be listed.” Approach TransUnion or Experian, South Africa’s major consumer credit reporting bureaus and they will guide you.

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Financial Management

What do I keep in mind for financial planning in a business?

In the startup phase of any new business, the profits will usually be quite low. It is therefore important to be wise with every cent in these early stages.

Peter Gossman



When doing financial planning for the first few months of my new business, what sort of things should I bear in mind?

Below are some financial considerations for the first few months of your new business.

1. Your Personal Salary

In this startup phase, the owner’s personal salary and the business viability will be strongly related. If you are solely reliant on your business to meet your needs, then you may need to reduce your lifestyle to ensure that your business will still break-even, while paying you enough to meet your essential needs.

Related: 6 Steps Of Financial Planning

Don’t start your business hoping to draw a large salary. This may come later, but seldom in the startup phase. Initially, you may have to personally contribute money to the business just to keep it afloat. If possible, work and save up as much as you can before starting your business. The startup phase will often require personal sacrifice.

Consider working a second job in the early months of your business. Your goal in the startup phase should be to take as little as possible from the profits, so that your business can grow as quickly as possible.

Reduce your personal lifestyle and expenses as much as you can. Carefully develop a personal monthly budget. Monitor this budget regularly and ensure that you adhere to it.

2. Separate business finances from personal finances

It is important to have a very clear separation between business transactions and personal expenses. Some owners use business funds for personal costs, often using cash from business sales to buy personal items, then declaring these as business expenses.

Any money taken from business profits for personal use cannot be expended to the business, nor should personal transactions be done through your business accounts. Also avoid business trading using your personal bank account. The only personal cost through your business accounts should be the salary that is paid to you.

3. Startup capital

In most businesses, you will need to invest money, (for stock, machinery, equipment, etc.) before you can trade. When determining your required startup capital, it is wise to start small and gradually scale up.

Avoid debt as much as possible. Focus on sales and begin selling as soon as you can. You don’t need a fancy office with billboards and business cards to start trading. Avoid large rental costs – initially try to work from home. Should you need a loan, try to get low-interest loans from friends and family before approaching institutions.

4. Cash flow forecast for your business

Plan a cash flow forecast for at least 12 months. Take time to realistically list the anticipated monthly cash flowing into your business (Sales, Loans, Investments), and out from your business (Salaries, Suppliers, Loan repayments, Rent, etc.).  Regularly review this forecast.

5. Accurately record all income and expenditure – personal and business

In order to draw up a realistic Personal Budget and Business Cash Flow Forecast you will need accurate historical information of all your business and personal transactions for the previous months. Start today: record all income and expenditure, especially cash transactions that do not leave a document trail.

Remember to keep personal records separate from your business records. Develop an effective filing system for all source documents.

6. Don’t give up

Starting a new business is tough, and the financial rewards are seldom seen in the startup phase. You may be tempted many times to just give up. Remember, every large tree started as a small seed and took a long time to grow.

If you give your small “business seed” the care and attention it needs, it will eventually grow and develop into a great tree and bear much fruit.

Related: How to Become a Millionaire by Age 30

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Financial Management

How should I calculate if a project is worth it?

Our turnover is great, but our profits are not. How do I calculate if a project is worth it? We excited by the deal, but I think they end up costing us more than they’re worth.

Louw Barnardt



How should I calculate if a project is worth it?

If you’re an entrepreneur without a strong financial background, one of the biggest business challenges you might face is the evaluation of a project’s financial implication. Often new projects are enthusiastically undertaken without proper consideration of the real profit the company stands to make.

A new project or contract always means more revenue, but often it does not end up being profitable in total.

If your business has been growing its revenue, but profit has been going sideways or down, your company is actually only spinning its wheels in terms of bottom line profit.

It might be time to implement a basic financial analysis before a project or contract is accepted.

Considering net present value

Before you roll out that new line of business or accept that project, take the time to consider its net present value. Sure, it generates income and keeps your team busy, but after prudently taking into account all costs and the effect of your cost of capital over time, is it still making you money?

The process to undertake can be broken down as follows:

  • First, understand your company’s cost of capital
  • Plot your project’s cash flows over its life span
  • Calculate the project’s net present value using your cost of capital.

Cost of capital

Cost of capital means the cost of the equity (the owners’ own money) and debt (borrowed funds) of the company. It is calculated as the cost of equity times the weighting of equity in the capital structure, plus the cost of debt times the weight of debt in the capital structure.

Cost of Capital = (cost of debt x weight of debt) + (cost of equity x weight of equity)

A basic example to simplify this mouth-full:

Financial decision making

Peter’s company is half-funded by himself, and half by a loan. The weight of equity is therefore 50%, and so is the weight of debt.

The interest on the borrowed funds is 12% per annum. Because the interest is tax deductible, we use the after tax cost of interest. The cost of debt is therefore 12% x 0.72 = 8.64%.

Peter’s expected return on the money that he put in is 30% to compensate for the risk that he is taking in putting money into his business.

Let’s keep it as simple as this for our example. Applying our formula, Peter’s cost of capital can be calculated as:

Cost of Capital = (cost of debt x weight of debt) + (cost of equity x weight of equity)

= (8.64%x50%) + (30%x50%)

= 19.32%

Peter now knows that his company will need to generate returns of at least 19.32% in order for him to adequately cover his cost of capital.

Plotting your project’s cash flows

Peter’s financial decision is whether or not to purchase a new line of software with a five year licence for his design company. The new software will enable a new stream of income, as well as add to existing income streams and will cost him R200 000. He has plotted the project income and expenses over five years as follows:

Basic NPV model

On face value, it looks like the total net inflow for the project over five years coming in at a positive R328 400 is a definite must. But in order to properly analyse this, we need to compute the project’s net present value.

Net present value

The net present value of a project is the current value of all the project’s future cash flows, discounted at the company’s cost of capital.

In basic terms, the R21 200 profit of year one, discounted at the cost of capital rate of 19.32%, is worth only R17 767 at the beginning of that year. Likewise we discount each year’s profit back to its current (year zero) value to get the present value thereof.

The sum of these discounted amounts then make up the net present value:

Net Present Value

The project’s NPV comes out negative at -R14 407. As the NPV is smaller than zero, Peter should not accept the project as it will generate less present value profit than the cost of the funds employed in making that profit. Not the same answer as that of the first look at the project’s profit.

Likewise, doing a basic cost of capital calculation for your company and a NPV calculation for each new project, entrepreneurs can make better financial decisions that will drive bottom line profits instead of just spinning the wheels in one place.

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Financial Management

Which comes first, accounting software or HR software?

Start with accounting software and grow from there.

Peter S. Cohan



Which do I need more for my small business – accounting software or payroll software? I can’t afford to buy both. And how do I choose between the plethora of options available?

Generally you should start with an accounting package and then add on others as you need them. That said, businesses are like fingerprints: Each one is unique, and has its own set of needs. You may need accounting or payroll or both.

It depends on details like how many staff you employ, how complex your finances are, and how many companies you’re running.

Choose the right software for your business

In my opinion this is one of the most important choices you will make because your accounting software is one of the most important business management tools you will invest in.

If you’re choosing professional software from a reputable software developer, the particular brand name shouldn’t really matter if they are trustworthy and have a strong local presence.

Goedkoop is indeed duurkoop

Too often I hear horror stories of small businesses buying the cheapest product on the shelf which is fine… until things go wrong.

The package doesn’t work properly, they can’t get support, the phones go unanswered and the company they bought the software from doesn’t have the resources to service its customers.

Take advice from your friends, your accountant, your bank, and then make sure you choose a brand with an established reputation and a local office that provides training, support and after-sales service.  Above all, understand that you are making an investment, not a purchase.

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