Document 168874
NEDBANK SMALL BUSINESS SERVICES MANAGEMENT GUIDE INTRODUCTION Do you feel adequately equipped to set up and run your own business? Are you a strategist, merchandiser, marketer, producer, human resources manager and financial expert? A few of all of the above skills are required to set up and run your own business. The task of establishing and managing your own business can be overwhelming. This business management guide will assist you in setting up and managing your own business effectively. The following may be some of the issues you are wrestling with right now: SECTION A HOW DO I VENTURE INTO MY OWN BUSINESS? 1. Starting your own business 1.1. Deciding on a registered name for your business. 1.2. What form of business should I set up? 2. Buying an existing business 3. Buying into a new or existing franchise All material copyright Nedbank 2004 1 SECTION B When you have set the business up or have decided to purchase an existing business, there are various obligations to fulfil. Following this step-by-step business management guide will equip you for success in your new venture. 1. How do I go about preparing my business plan? 1.1 Confidentiality agreement 1.2 Details of your organisation 1.3 Details of your product/service 1.4 Analysis of your market 1.5 Key strategic options 1.6 Why would the business succeed? 1.7 What is your basis for growth? 1.8 The marketing plan 1.9 The production plan 1.10 Organisational plan 1.11 Financial plan 1.12 Strategy 1.13 Action plan 2. What are my obligations now that my business is ready to begin trading? 2.1 Value-added tax (VAT) 2.2 Regional Services Council (RSC) levies 2.3 Business tax 2.4 Your own tax 2.5 Employees tax All material copyright Nedbank 2004 2 2.6 Unemployment Insurance Fund (UIF) 2.7 Skills Development Levy (SDL) 2.8 Workmen’s compensation 2.9 Insurance and assurance 3. Staff issues 4. How do I go about financing the operation? 5. What will the bank look for in assessing an application for finance? 6. How do I analyse my own financial statements? 7. What controls do I need to have in place? 8. What risks should I be aware of? 9. What should I consider if I am looking to expand my business? 10. How do I plan for my retirement? SECTION C Other matters to consider for your business 1. Black economic empowerment 2. Donations tax 3. Capital gains tax 4. Retention of records All material copyright Nedbank 2004 3 SECTION D SMALL BUSINESS SER VICES calendar SECTION E SMALL BUSINESS SERVICES dictionary SECTION F Useful website addresses SECTION A There are three ways of venturing into your own business: 1. Starting your own business 1.1 Deciding on a registered name for your business 1.2 What form of business should I set up? 2. Buying an existing business 3. Buying into a new or existing franchise All material copyright Nedbank 2004 4 SECTION A YOU HAVE DECIDED TO START YOUR OWN BUSINESS! WHAT NEXT? 1.1 Your first priority is to decide on a registered name for your new venture. The name of your business should clearly identify what you are offering. It should give your customers a clear indication of what your business is all about. 1.2 You will then need to decide on what form the business will take. Each of the following structures has its own limitations and merits, therefore the decision will depend on the nature and complexity of your business. It would be best to consult with a lawyer or accountant when making this decision, taking into account the growth and expansion plans for the business. Sole Partnership Proprietor Close Private Corporation Company (CC) Who ow ns the You ow n and A partnership A close A private business? run the can have corporation company can business and betw een 2 can have have betw een make the and 20 betw een 1 1 and 50 decisions. partners and 10 shareholders (natural or members and a legal). (only natural minimum of 1 persons). director. All material copyright Nedbank 2004 5 Complexity A simple form A simple form A more A very of trading of trading complex form complex form of trading of trading Legal Founding No legal Must fulfil the Must fulfil the formation documents requirements requirements requirements requirements are not but a legal of the Close of the necessary. partnership Corporations Companies agreement Act. Act. must be in place. Legal status Accounts No separate No separate Separate legal Separate legal personality personality personality personality from the from the from the from the ow ner partners members shareholders Should be Should be An accounting A firm of kept but no kept but no officer must registered formal audit is formal audit is be appointed accountants necessary. necessary. to prepare and auditors financial must be statements appointed to annually but audit the no formal financial audit is statements of necessary. the company annually. They need not be published. Taxation You, as the The Enterprise Enterprise ow ner of the partnership is pays tax pays tax business, pay not taxed and according to according to All material copyright Nedbank 2004 6 Liability tax. You need partners pay company tax company tax to register tax in their rates and w ill rates and w ill with the South personal pay secondary pay STC on African capacities. tax on the distribution Revenue Partners need companies of Service to register as (STC) on the profits (SARS) as a provisional distributions (dividends) provisional taxpayers with (dividends) made to taxpayer. SARS. declared to shareholders. members. The The company CC must be must be registered as registered as a provisional a provisional taxpayer, as taxpayer, as must the must the members. shareholders. No protection No protection Members can Shareholders of limited of limited enjoy limited can enjoy liability. The liability, each liability, the limited liability risks of partner is assets and as the assets business personally debts of the and debts of extend to all responsible CC are its the company personal and for debts ow n property. are its ow n. business incurred by assets. the business. It is important to note that a close corporation can be converted to a private company and vice versa. All material copyright Nedbank 2004 7 Now that you have decided on the structure of your business, you will need to consult with a legal expert with regard to setting up the enterprise, submitting the necessary forms and preparing the necessary agreements before you begin trading. You will then need to prepare a business plan for the planning stage of your business in order to set your objectives and determine how you will achieve them. This is an integral part of your business and can never be ignored. 2. BUYING AN EXISTING BUSINESS The most important aspect of buying an existing business is that you research the opportunity thoroughly with the help of a good accountant and lawyer. You need to be sure that you know what you are buying in order to obviate unexpected surprises when the sale has been finalised. SOME CRUCIAL ELEMENTS TO CONSIDER IN YOUR DECISION TO BU Y A BUSINESS: 2.1 Ask the question - Why is the business for sale? The answer to your question may be obvious when the seller is emigrating or retiring but less obvious in other circumstances. Do not accept anything at face value and test its validity if you have any doubt. 2.2 Find out what form the business is trading in. All material copyright Nedbank 2004 8 If the business is trading as a close corporation or private company, there is perpetual succession with a change of members/shareholders. You will need to do some investigation regarding the entity. A check with the Information Trust Company (ITC) or a copy of a bank report from current bankers will give you some indication of the trading history. 2.3 Request annual financial statements and the most recent management accounts. If you are buying the business from a private company, insist that you receive audited financial statements. Insist on a copy of bank statements for the same period. Be cautious in accepting anything older than three months when making your decision. Request a copy of the past three years’ tax assessments and VAT returns. 2.4 What are you buying? You need to be clear on what is actually for sale, for example: - Assets Current assets would include current debtors, stock and equipment, plant and machinery. - Request a list of the movable assets and physically inspect them. Insist on confirmation that these assets are paid up or obtain outstanding lease agreements and current statements. All material copyright Nedbank 2004 9 - Request a list of debtors if applicable to the sale in order to assess their quality and to assess the risk of potential bad debts at any stage. Analysing the age of the debtors would give you a good indication of the controls within the business regarding the collection of outstanding accounts. Be careful of buying existing debtors. You are at less risk if you can start afresh at the date of sale unless, of course, they are AAA-rated debtors. The inventory value at cost must be determined, with a physical inventory count on the day the sale becomes effective. - Liabilities would include creditors: o Request a breakdown of creditors and check their ageing. Be cautious of buying creditors of an existing business as they can easily be disguised. If possible, ask that creditors be settled as at the date of sale so that you can start afresh. - Goodwill This is the intangible asset of the business, the brand value that the existing owner has built up over time. It includes the brandname, customer base and intellectual property that contributed to the success of the business. - Property This can be fixed property owned by the business. It would All material copyright Nedbank 2004 10 be best to have a formal valuation done. A deeds office search would verify and confirm ownership. - Contingent liabilities: o Check on any outstanding contingent liabilities (any guarantees or obligations to third parties) and any current contracts in force. - Loan accounts and shares. If the business does not own its premises, review the current lease agreement to determine the expiry date of the agreement and any renewal conditions. Staff are vital to any e xisting business, so you need to investigate the following: - Which staff will remain in the business and who will have to be replaced? - Check the standard employment contracts, pension and other retirement benefit arrangements. - Check what incentive and bonus schemes are in place. - Check what trade union agreement or collective bargaining agreements are in place. 2.5 What is a fair price to pay? All material copyright Nedbank 2004 11 This could be the subject of much debate as the seller could believe the business is worth more than you are willing to pay. At the end of the day, the more research you have done, the more negotiating power you will have. There are many ways of valuing a business and, once again, your accountant will add great value in this process. The following could help you as a guideline in assessing the worth of the business: Step 1 Look at the true earnings of the business and decide on what you think is a fair rate of return to expect. This will give you a super profits value. Step 2 Determine the intrinsic value of the business by subtracting its liabilities from its assets. This gives you the net asset value of the business. 2.6 Do your own investigations - Check that the business is licensed and has all the necessary permits etc. Check that all payments are up to date. - Check if there are compliance requirements and if these have been All material copyright Nedbank 2004 12 met. - Talk to suppliers. This is a good way to assess how the business has been run and is also a good way to check the accuracy of the financial information given to you. - Talk to key staff, as this will give you a good insight into the business. Once you have decided to go ahead with buying the business, you should consult with your legal consult with ant/a tax expert/your accountant to best structure the agreement having regard to tax efficiency and legal requirements. You will also need to consider the following: - Ad vertising the sale in the Government Gazette. - A restraint of trade agreement so that the seller cannot open another business in close proximity and place your business at risk. - Ensure that you have legal recourse to the seller should any form of misrepresentation appear after the date of sale. A business plan will need to be prepared if you are buying an existing business in order to set your own objectives and plan how you will achieve these. This is an integral part of your business and can never be ignored. BUYING A NEW OR EXISTING FRANCHISE All material copyright Nedbank 2004 13 A franchise is a business that involves the granting of a license by a franchisor to another party (the franchisee), which entitles the franchisee to trade under the established trade name. Some of the advantages of buying a franchised business are: - Buying an entire business concept that has been researched thoroughly thereby minimising your risk. - Buying into an established brand name. Brand equity in a business is the most difficult thing to create. - Induction and training in all aspects of running the business. - Trading in a business where operational efficiency already exists due to tried and tested methods by franchisors. This prevents you from incurring costly mistakes in an attempt to achieve operational efficiency. - The franchisor will provide you with the necessary skills and technology to run the business. - Your cost of supplies is normally lower as you receive discounts normally only offered to larger businesses because you are buying under the franchise name. All material copyright Nedbank 2004 14 - Specialist assistance is offered e.g. labour consultants, market research and product development. - There is proven quality control in your product. - Financial assistance is frequently offered by the franchisor in setting up. Some disadvantages of owning a franchise are: - It limits your personal initiative as you are obliged to trade in line with the franchise head office’s initiatives and strategies. - Your startup costs are normally higher to keep within the corporate identity. - Royalties, which are a percentage of your turnover payable to the franchisor, are an extra expense and can range between 9% and 11% for an established franchise. - You are obliged to keep in line with the advertising and promotions set by the franchisor. A business plan will need to be prepared if you are buying an existing franchise or setting a new one up in order to set your own objectives and plan how you will achieve these. This is an integral part of your business and can never be ignored. Some additional aspects to consider when buying a franchise: All material copyright Nedbank 2004 15 1. Consult with a legal professional who specialises in franchises to scrutinise the franchise agreement before you sign. 2. If possible, choose a franchise registered with the Franchise Association of South Africa (FASA). FASA e xists for the following purposes: - Promotes the concept of franchising; - Issues guidelines for the operation of franchise systems; - Applies a code of ethics to the industry; - Promotes franchises in the small business community; - Maintains a data base of all franchises; - Provides education on franchise matters; - Represents franchises in dealings with the government, the media and the public; and - Publishes useful handbooks on various aspects of franchising. All material copyright Nedbank 2004 16 As South Africa does not have specific legislation governing franchises, FASA has devised a code of ethics for the governing of franchise businesses. 3. Consider the costs of opening a new franchise or buying an existing one. 4. Beware hidden costs. All material copyright Nedbank 2004 17 SECTION B When you have set the business up or have decided to purchase an existing one, there are various obligations that you are required to fulfil. Following this step-bystep business management guide will equip you for success in your new venture. 1. How do I go about preparing m y business plan? 1.1 Confidentiality agreement 1.2 Details of your organisation 1.3 Details of your product/service 1.4 Analysis of your market 1.5 Key strategic options 1.6 What will make the business succeed? 1.7 What is your basis for growth? 1.8 The marketing plan 1.9 The production plan 1.10 Organisational plan 1.11 Financial plan 1.12 Strategy 1.13 Action plan 2. What are my obligations now that my business is ready to begin trading? 2.1 VAT 2.2 RSC levies 2.3 Business tax 2.4 Your own tax 2.5 Employee’s tax 2.6 UIF 2.7 SDL 2.10 Workmen’s compensation 2.11 Insurance and business assurance All material copyright Nedbank 2004 18 3. Staff issues 4. How do I go about financing the operation? 5. What will the bank look for in assessing an application for finance? 6. How do I analyse my own financial statements? 7. What controls do I need to ha ve in place? 8. What risks should I be aware of? 9. What should I consider if I am looking to expand m y business? 10. How do I plan for my retirement? SECTION B HOW DO I GO ABOUT PREPARING MY BUSINESS PLAN? You are now ready to start the planning stage of your business. The tool that any business should use for this task is a business plan. It is a road map which will outline the goals and objectives of the business and serves as its resumé. It states where you are now, where you want to go, how you will achieve your vision and why you ha ve chosen to tackle the opportunity in a specific way. Many small businesses neglect this part of their planning process as they see it as a non-essential task, but without one you might not achieve the success you are striving for. Every business should have one and it should be updated periodically in line with your one-, three- and five-year plan for your business. All material copyright Nedbank 2004 19 Time spent on your business plan at the outset is time and money saved later. Simply put, a business plan is an outline of objectives and goals and it defines how you are intend to achieve them. Take the time to prepare the plan, as it could identify any pitfalls before they occur, and update it as you move along your journey. It could also help in acquiring additional financial and operational resources, if required. The level of detail in the business plan will depend on the nature and complexity of your venture. The business plan will help you to assess your opportunity objectively and answer critical questions, some of which are: - What are the ingredients for survival in the industry? - What are the key ingredients for success? - How much time is required to build the business? - How can I ensure the business will be profitable? - How and when is it appropriate to ‘harvest’ my business? The key components of a business plan are as follows: 1. Confidentiality agreement 2. Details of the organisation − Your mission statement − Your vision statement − Organisational objectives − Organisational values 3. Details of your product/service 4. Analysis of your market All material copyright Nedbank 2004 20 − SWOT analysis, looking at the business internally and externally in order to identify the strengths, weaknesses, opportunities and threats. 5. Key strategic options 6. Your sustainable competitive advantage 7. Basis for growth 8. The marketing plan − Stating your marketing objectives and sales forecasts − Developing your marketing strategies − The marketing budget − Marketing action plan and controls 9. The production plan − Your competitive advantage − Location and layout − Production process and plan − Production capacity − Scheduling − Supplies and inventory − Equipment to be used − Production budget 10. Organisational plan 11. Financial plan 12. Strategy 13. Action plan 1.1 Confidentiality agreement All material copyright Nedbank 2004 21 If you intend to circulate the business plan to outside parties (your banker, a potential investor or shareholder), you may want to consider attaching a ‘confidentiality agreement’ to protect your intellectual property. An e xample of a confidentiality agreement is given below or you could consult with a legal expert to assist in drawing up such agreement for you. An yone who reads your business plan should sign this beforehand. All material copyright Nedbank 2004 22 Confidentiality agreement I… … … … … … … … … … … … … … of … … … … … … … … … … … … … … .. hereby acknowledge that information contained in the business plan of … … … … … … … … … … … … … … … … … … … (name of your business) is confidential to the owners of the … … … … … … … … … … … … … … … … . (name of your business). I hereby undertake not to use and to keep secret and confidential all such information and shall not permit or allow the same to be disclosed to any other persons or person. Signature… … … … … … … … … … … .Date … …… … … … … .. 1.2 The organisation Now you are ready to begin with the hard work encompassed in your business plan by applying your mind to setting the business up – the first step in making your business a success. This section of the business plan helps to structure the core of your business. It gives an overview of the activity, structure and history of the business, where it is going and who will be involved. The following areas should be addressed: - Registered name - Founders All material copyright Nedbank 2004 23 - Business structure − The legal structure and form − Who are the owners of the business and, if applicable, note their percentage interest. − If the business is organised around a corporate structure, who are the directors (and their voting rights), who is the chairman and if there is a shareholders’ agreement provide a brief overview. - Commencement date of operation - Principal activity of business - History − What major events/milestones have occurred to date, what results have been achieved so far, what has the management team achieved? - Mission statement − The mission statement defines what your business is or wants to be. It is the organisation' s reason for existence. Some of the questions you should ask yourself in preparing your mission statement are: What business or activity are we engaged in? Who are we involved with? Where are we taking the business now and in the future? Why are we undertaking this particular business/activity? - Vision statement The vision statement provides the overall direction in which the organisation should be heading; it keeps all parties in the organisation on the same track towards the defined goals. All material copyright Nedbank 2004 24 - Organisational objectives These should flow from your mission statement. The specific performance measures can now be quantified in measurable performance targets. - Organisational values Values represent what the organisation and its people stand for and are the underlying principles that shape and guide the organisation’s interactions with suppliers, distributors, customers, employees, investors, community and other stakeholders. 1.3. The product/service This section should provide an overview of your product(s)/service, including the following information: - A brief description of your product/service in terms of its function and its unique application. - What is the status of the product/service e.g. does it still need to be developed or is it at a commercialisation stage? - A description of how the intellectual property is protected, who owns it and what consideration was paid for it. - How does the product/service satisfy a need? What benefits are there to the consumer and what are the principal markets? - What is the unique selling proposition for your product? - Who has tried or assessed the product/service and what was their feedback? Has it been tested? All material copyright Nedbank 2004 25 - Are there any substitutes for the product/service? - How do the main features of the product/service compare with those of your competitors? - A brief history of what your team has achieved in enhancing the product/service to make it more suitable for the chosen market. 1.4 Market analysis The strategic analysis section of the business plan summarises the data you have collected on your business and its environment. From this data you will be able to identify the strengths and weaknesses of the business and the opportunities and potential threats in the environment. This process is called a ‘SWOT’ analysis. In order to complete the SWOT analysis you will need to answer the following questions, based on an assessment of the business internally and externally. - What are the organisation's strengths and weaknesses? These are identified from analysing the business internally in order to identify those factors that influence how well or how poorly your business can service the needs of its customers and stakeholders. - Does your product/service have a sustainable competitive advantage? - What is the source of your sustainable competitive advantage? - What are your strengths? - What is your business not good at? - What areas require development? All material copyright Nedbank 2004 26 - What opportunities and threats face the business? These are identified from analysing the business externally to identify those factors that affect your business e.g. economic variables such as inflation and foreign exchange rate fluctuations. Opportunities can be exploited and pursued while threats can damage, constrain or destroy your business! It is worth noting that internal factors can be controlled from within your business whereas you have no control over external factors but must be aware of their potential impact on your business. The SWOT analysis should be presented in summary form after you have done a thorough analysis of the internal and external environment. In analysing the organisation’s internal environment, the following areas should be investigated: - Primary activities of the organisation - These would include all activities associated with supplying your product/service to your customer from start to finish, including production, delivery and marketing. - Support activities - These would include activities such as human resources and financial management. - Firm infrastructure - Financial analysis - Financial ratios are a good tool to use because they allow you to compare your company with industry standards. All material copyright Nedbank 2004 27 - Organisational culture and leadership - Organisation’s reputation In analysing the business externally, the following areas must be taken into account and their potential impact on your business should be understood: - Macroeconomic environment, which deals with the state of the economy nationally and internationally. This would include aspects such as interest rates, inflation, foreign exchange rates and gross domestic product growth. These are all indicators of the state of health of the economy. - Technological innovation affects most products and services as well as the way in which they are created and produced. This in turn has enormous cost implications, which could impact your offering and business. - Social trends encompass demographic and cultural changes. These changes may pose significant challenges to your business. - Changes in the political and legal environment may inhibit or enhance the freedom of a business to continue its activities. - Developments in the global environment may have positive or negative implications for your business. Are there any trade restrictions between two countries that may impact your potential customer or supplier base? An industry and market analysis specific to your business will enable you to answer the following questions: - Is there really an opportunity for your business in the industry? All material copyright Nedbank 2004 28 - What are the industry characteristics? - What are the characteristics of your target market? - In what shape is the market you will be operating in? - What is the profile of your customers? - Will customers want to buy what you have to sell? - Who are your major competitors and what are their strengths and weaknesses? 1.5 Key strategic options Key strategic options are developed from an assessment of the interactions between the main strategic strengths, weaknesses, opportunities and threats. The SWOT analysis completed by you will provide the basis for developing the ‘key strategic options’ for your business. The tools listed below can be used to separate strategic issues from operational issues. ISSUE FROM SWOT OPERATIONAL IN STRATEGIC IN ANALYSIS IDENTIFIED NATURE NATURE When will this issue Now After two years or more Small Very significant ‘impact’ on the organisation? How great an impact will this issue have on your business? How broadly issue will affect this Will affect some parts of your the business Will affect all of the business business? How great is the risk Small All material copyright Nedbank 2004 Big 29 attached to ignoring the issue? Will strategies to address Minor change Major changes the issue involve changes in product/services, pricing, promotion, personnel or business? Now that you have identified the main strategic issues, you are able to formulate strategies to address them. Firstly, you need to identify any interactions between the issues you have noted on your short list and determine if any strategy can be put in place to combat them. The following table may be of assistance in this regard. Step 1. Identify interaction between: Step 2. Formulate strategies to take advantage of interaction Key strength and opportunity items What strategy can be formulated that will build on this strength item to take advantage of the opportunity item? Key strength and threat items What strategy can be formulated that will build on the strength item while reducing the threat item? Key weakness and opportunity items What strategy can be formulated that will either negate this weakness or develop this weakness into a strength so that the threat item is reduced? 1.6 Why will your business succeed? All material copyright Nedbank 2004 30 You will now need to consider and document your sustainable competitive advantage. What is your business’s competence? Why will customers buy from you? Why do your think your business will succeed? Why are you better than your competitors and will your product and product design meet these requirements? Sustainable competitive advantage is the value your business will create for its customers. It allows you to perform above average and to outperform your competitors. It is important for you to identify your competitive advantage in order to plan how you will compete in your market. This should be done in conjunction with your SWOT analysis. 1.7 What is your basis for growth? The final issue to consider in formulating the overall strategic direction of the business for the next three to five years is how your business can grow. Your business can grow in various ways but ultimately it will depend on your customers and your offering. You could consider the following growth strategies: TYPE OF GROWTH STRATEGY WHAT IS IT? HOW DO I GO ABOUT IT? Market penetration This is an increased 1. Price incentives on a usage of your existing sliding scale offering in your existing according to usage customer market. 2. Building on an additional service All material copyright Nedbank 2004 31 with the existing offering - bundling your products/services 3. Identifying alternative uses for your existing offering 4. Increasing your promotional effort to attract clients from your competitors New market development This is an increased 1. Developing new usage of your product in geographical markets by new markets. expanding regionally, nationally or internationally 2.Developing new market segments by obtaining referrals or by advertising in alternative media forms 3. Converting potential clients who currently do not use product/service your by offering free trial use of your offering or by finding alternative All material copyright Nedbank 2004 32 uses for your offering which may be attractive to them. New development product This strategy is aimed at 1. Developing new introducing new/varied features for your products to your existing product/service customer market. 2. Developing variations to your e xisting product/service 3. Developing new products/services aimed at your existing customer market Diversification This strategy entails the 1. Backward integration introduction of a new e.g buying an accounting offering to a new recruitment agency customer market. 2. Forward integration e.g buying a business that would make use of your services 3. Using your existing distribution network e.g. selling additional types of products/services through your current distribution network. This maximises All material copyright Nedbank 2004 33 economies of scale. 4. Stability development e.g. buying a declining business with the objective of turning it around to make it profitable. 5. Mo ving into a completely new customer market with a totally different product. Market penetration and new market development strategies are seen as low-risk strategies as they are easy to implement and you will be familiar with the requirements. New product and diversification strategies have a higher risk as they contain an element of the unknown. Bear in mind that the rewards of a business are determined from your risk vs. return. Whilst too much risk may put your business at unnecessary threat, it is also worth mentioning that no one makes money the easy way without taking any risk at all! 1.8 The marketing plan Now that you are clear on what you want to do and how you are going to do it, you will need to decide how you are going to persuade your chosen customer market to buy/use your product/service. This is a very important step. There is no use in designing and producing your offering if no one is going to buy it. The key components of your marketing plan would be: All material copyright Nedbank 2004 34 1.8.1 Stating your marketing objectives and sales forecasts 1.8.2 Developing your marketing strategies 1.8.3 The marketing budget 1.8.4 Marketing actions plans and controls 1.8.1 Stating your marketing objectives and sales forecasts - Ensure that your marketing objectives fall within the context of your mission statement and are consistent with your vision statement. - Be realistic, you must be able to deliver. - Give time frames for your objectives and sales forecasts. - State the assumptions about your customers and competitors which form the basis of your objectives and strategies. - Quantify your objectives. When formulating your sales forecasts it is a good idea to develop three different scenarios with which to work. It is also imperative to provide a five-year forecast. These could be: 1. The most likely results 2. Best-case scenario 3. Worst-case scenario 1.8.2 Developing your marketing strategies Your marketing strategies will encompass the 4P’s of marketing – product, place, price and promotion. They will revolve around how you plan to penetrate and develop your chosen market and how you will grow your customer base by delighting them and exceeding their expectations. All material copyright Nedbank 2004 35 PRODUCT How will your product be presented? PLACE How will your product be distributed to your customers? PRICE What is your pricing strategy? PROMOTION How will you promote your product so that your customers will know about it? 1.8.3 The marketing budget You need to detail what it would cost to get your offering to your customer in terms of your marketing plan. Expenses incurred in these areas will flow into your financial forecasts. Some of these expenses could include: - Market research - Packaging and distribution - Brochures - Ad vertising 1.8.4 Marketing action plan and controls The marketing action plan will provide details for the implementation of the marketing plan. State in priority order the tasks required, who is responsible for executing the tasks, the relevant costs to complete the tasks, and due dates for completion. Control factors to monitor the components and activities of the marketing plan should also be detailed i.e. customer satisfaction levels, competitor activity, customer buying trends. 1.9 The production plan All material copyright Nedbank 2004 36 You need to decide how you plan the production of your offering and what resources will be required to get it to the customer. Production strategies focus on how to produce quality products and services at the right place, right price and right time. They also focus on how to competitively deliver the product/service to your customer. They will also create a competitive distribution network that delivers in good time. The key components of your production plan will be: 1.9.1 Competitive advantage 1.9.2 Location and layout 1.9.3 Production process and plan 1.9.4 Production capacity 1.9.5 Scheduling 1.9.6 Supplies and inventory 1.9.7 Equipment to be used 1.9.8 Production budget 1.9.1 Competitive advantage Earlier in your business plan you identified your sustainable competitive advantage and what sets you apart from competitors in the industry. This needs to be carried forward in all aspects of the production plan. A manufacturing business has to consider quality in an efficient manner throughout the production process, from the receiving of materials to the final delivery of the product/service to the customer. This applies similarly to a service industry. People, procedures and policies all form the basis of a service business and quality must be reflected in all aspects of your production plan. Not only do you need to start with a competitive All material copyright Nedbank 2004 37 advantage but it needs to be maintained and constantly improved. Examples of the areas you could focus on to develop a competitive advantage include: - distribution network - brandname - service network - reliability - product development - price competitiveness - staff training 1.9.2 Location and la yout In the case of a service business or manufacturing business, location will be influenced by access to raw materials used in producing the product as well as the ability to deliver the endproduct to your customer. You have to assess what will be best for your product/service and what is important to get the right product/service to the right customer at the right time. Proximity and availability of skilled or trained labour is vital. The plan and layout of the plant or service facility can be in the format of a drawing. It should show an arrangement of plant and equipment for production or delivery to occur with maximum ease. It should indicate the flow of activities from input, production and storing to delivery of the endproduct/service. 1.9.3 Production process and plan It all begins with the customer placing an order. For the production process and plan, you need to plan the production process systematically. All material copyright Nedbank 2004 38 The easiest way to do this is by means of a flow chart and from there you can determine the timing and costing for each process or part thereof. 1.9.4 Production capacity Capacity planning begins with the demand for the various products and services your business intends to produce. You will need to consider production capacity in conjunction with the products and services to be offered to your market as well as the production processes. 1.9.5 Scheduling Scheduling is influenced by the customer’s need for delivery and the delivery of raw materials/services from your suppliers. You need to equate these two factors and ensure there is sufficient lead time to allow for delivery in good time. This needs to be assessed in conjunction with the planning process and in particular with your staffing requirements so that your customer’s waiting period is kept to a minimum, if any. 1.9.6 Supplies and inventory This will give you a clear indication of the required lead time for the delivery of raw materials and what stock to keep on hand. This will affect your cash flow and financing requirements and is a very important part of the control mechanisms in your business. Without tight controls over raw materials and finished products, you could face the threat of uncontrolled wastage, theft and an unnecessary amount of cash being tied up in finished products in storage waiting to be sold. All material copyright Nedbank 2004 39 1.9.7 Equipment to be used This will depend on the production process and the output and efficiency requirements of the business. You need to research your input requirements in order to produce/deliver/fulfil your customers’ needs. 1.9.8 Production budget The expenses in this budget will flow to your financial forecasts later on in the business plan. Your production budget could look like this: Production expense details Month Month Month Month Actual Budget Variance 1 2-3 4-11 12 Ytd Ytd Ytd Product costs Manufacturing overheads Quality assurance Information Systems Capital expenditure items Equipment purchases All material copyright Nedbank 2004 40 This should also be done on an annual basis going forward. 1.10 The organisational plan Now that you have resolved the product/service, marketing and production aspects of your business, you are ready to consider the people issues. Areas to address include the following: - Brief resumés of the management team - Development of performance standards, measurement and feedback - Job and work designs - Occupational safety issues - Recruitment and induction strategies - Reward systems - Staff training needs analysis - Staffing requirements - Strategies for encouraging innovation in the organisation - Wage expense details - Other relevant human resources issues All material copyright Nedbank 2004 41 To quantify your business plan, it is necessary to draw up a budget which include associated expenses, for example: Organisational expense Month Month Month Month Actual 1 2 3-11 12 Ytd Budget Variance Ytd Ytd details Administrative Wages Incentives Recruitment Training Occupational safety Other TOTAL 1.11 The financial plan This is the final part of your business plan and consolidates the strategies you have established earlier in the plan. This section of the business plan can be complex so it might be a good idea to consult with your accountant. The following items need to be addressed in your financial plan: All material copyright Nedbank 2004 42 1.11.1 Financial history This would apply to a continuing business. 1.11.2 Underlying assumptions These assumptions, which arose from your research, formed the basis of your financial projections. 1.11.3 Breakeven point You will need to determine your breakeven point, based on sales volumes, variable costs and the level of fixed expenses. 1.11.4 Sensitivity analysis This would flow from your SWOT analysis, providing the worst-case, most likely and bestcase scenarios. It is known as a cash flow analysis. 1.11.5 Key financial ratios You can derive these from your financial statements and industry standards, and comparisons should also be given. 1.11.6 Funding and expansion plan You need to determine how you are planning to source the funds required to begin production and how these funds will be spent. You should also include information about timing, what type of funding you require and how the funds will be repaid. All material copyright Nedbank 2004 43 1.12 Strategy Given that you are just starting out, it may seem bizarre to consider what to do with your business eventually. The fact of the matter is that we all have to get out of business at some stage. Age or health could force this or your objectives could change over time. Hence, you need to devise ‘harvest’ strategies to maximise your gain now in order to eventually dispose of the business with a maximum return. Possible harvest strategies could include the following: 1. Transfer/sell your business interests to siblings or other family members. 2. Appoint managers to manage and run your business and use the cash generated to pursue other activities - you could decide to embark on a cash cow. 3. Initial public offering – a stock exchange listing 4. Merger/Acquisition 5. Outright sale of the business in the open market 6. Management buyout (MBO) – Sell the business to management 7. Employee share ownership scheme. This would entail selling some of the equity of the business to employees. Each of the above harvest strategies would take your business in a different direction and require different actions whilst you are managing it. 1.13 The action plan The last aspect required to complete the business plan is the action plan. This is a All material copyright Nedbank 2004 major 44 list of tasks required to be implemented in order to achieve the objectives you have set out in your plan. Tasks need to be allocated to specific team members/outside resources, completion dates set, and follow-up dates and defined costs determined. Tasks should also be prioritised. Key to the successful execution of a well-defined business plan is the establishment of a definite action plan where individuals are held accountable, regular review sessions are held and further action is taken. Example of an action plan Revision date … … .. Task priority WHAT IS THE Responsibility for To be completed TASK? ensuring task is by completed Finance A 1. Identify sources M Guthrie 27 January 2004 B 2. Letters of M Guthrie 15 February 2004 introduction Manufacturing B 1.Obtain suppliers’ K Lottreaux 17 February 2004 quotes for comparison All material copyright Nedbank 2004 45 Marketing A 1.Develop R Patterson 31 January 2004 B strategies J Herman 25 February 2004 2.See distributors Well done ! You ha ve now completed the planning stage of your new venture. 2. WHAT ARE MY OBLIGATIONS NOW THAT MY BUSINESS IS READY TO BEGIN TRADING? Legal issues - Licensing, registration and statutor y obligations You are now ready to get the business registered and licensed so that you can start trading and creating wealth. 2.1 VAT VAT is an indirect tax charge on most transactions. The current rate is 14%. All material copyright Nedbank 2004 46 If your business renders taxable supplies/turnover of R300 000 or more per annum, you will need to register for VAT and so become a VAT vendor. This means that you will add 14% onto your sales and in turn pay it over to the SARS in the form of output ta x. This also means that you can claim the VAT back on your purchases for materials, capital equipment and any other expenses incurred by you as long as you have a tax invoice from your supplier. Even bank charges are vatable and may also be claimed as an input credit from SARS in your VAT return. Businesses who do not turn over R300 000 per annum may, however, elect to register for VAT. You should consult with your accountant as there are advantages and disadvantages in doing this as long as your turnover is over R20 000. What to do to register? You can obtain a VAT application form from the SARS website or your local SARS office. The following must be attached to your application: - Copies of the IDs of the owners of the business - A letter from your bank confirming the details of your bank account - A cop y of your registration certificate/founding statement if a close corporation or company is being registered - A cop y of the partnership agreement, if applicable - A cop y of your business plan showing financial forecasts - A letter from your accounting officer confirming that they will be acting on your behalf All material copyright Nedbank 2004 47 Remember, certain products are ‘VAT exempt’ or ‘zero rated’. On VAT exempt products no VAT may be claimed back or paid and on zero-rated products no VAT may be added onto the selling price, but VAT may be claimed on the expenses that went into the production of these products. You will not be able to claim VAT on all your expenses and you should make yourself familiar with these exceptions at the outset. Your local SARS office will be able to assist in this regard. You will need to submit a VAT return to SARS by the 25th of the month following the end of your tax period. SARS will set out your tax periods for you once you have been registered as a vendor. If you do not submit your return or make payments in good time, penalties will be levied by SARS on your business. 2.2 RSC levies Two types of levies are applicable: 1. The service levy is calculated at the applicable rate on all remuneration paid to employees of the business and on drawings by the sole proprietor or partner of a business. 2. The establishment levy is calculated at the applicable rate based on he turnover of your business (excluding VAT). Monthly returns need to be completed and submitted to your local Regional Services Council and payment made monthly by the 20th in respect of the previous month. Levies are allowed as a tax deduction for All material copyright Nedbank 2004 48 income tax purposes. Interest will be levied on late payments and submission of returns. Certain types of organisations (e.g.non-profit and charitable organisations) are exempt from registration for these levies, so it would be good idea to contact your local Regional Services Council before beginning your operation. 2.3 Business tax If you are a sole proprietor or partnership: A sole proprietor and partnership does not have separate personalities from the owners of the business and therefore does not need to register for tax. You, the sole proprietor or partner, will pay tax in your own right on the profits. Close corporations or private companies have separate legal personalities from the members/shareholders and have to register independently with SARS as provisional taxpayers. The current tax rate for close corporation/company is 30%. For small business corporations the current tax rate is 15% on the first R150 000 and 30% on taxable income exceeding R150 000. If you feel your business qualifies for the small business corporation relief from SARS, check with your accountant as certain types of business are excluded. The current turnover limit is R5 million. Members/shareholders may draw the remaining profits in the close corporation/company by means of a dividend. This is tax free in the hands of the member/shareholder, but the close corporation/company must pay 12, 5% on the net dividend in the form of STC. All material copyright Nedbank 2004 49 The close corporation/company therefore pays a flat tax rate of 30% on taxable income and a further 12,5% STC on any dividend declared to its members. The annual SARS assessment will coincide with the financial year-end of your company. Your ta x return must be submitted to SARS within 60 days of this date. Your business will be required to make provisional tax payments at the following stages during the year: - Six months before your company’s financial year-end - At your company’s financial year-end - Six months after your financial year-end if your ta xable income exceeds R20 000 - Seven months after your financial year-end if it falls at the end of February annually. 2.4 Your own tax As a sole proprietor/partner/member of a close corporation or director of a company, you will need to register as a provisional taxpayer with SARS to make your own tax payments on drawings taken by you from your business. Your individual year of assessment ends on the last day of February each year. You will be required to make provisional tax payments by 31 August and 28 February each year and if your ta xable income exceeds R50 000 also on 30 September each year. 2.5 Employee’s tax All material copyright Nedbank 2004 50 As soon as you employ staff, you will need to register as an employer. What does it mean to be an employer? - Your responsibility as an employer involves keeping a record of all remuneration paid to employees and all employee’s tax deducted from their remuneration - You must pay the employee’s tax to SARS within the prescribed time. - You must obtain all employee information on the prescribed IRP 2 form supplied by SARS. - You will have to calculate standard income tax on employees (SITE) at the end of each tax period and collect any SITE underdeducted or refund any SITE overdeducted. It is your responsibility to calculate SITE and make sure that the correct amount is deducted from the employee’s remuneration. - An IRP 5 must be issued to every staffmember to whom you have paid a salary and from whom you have deducted tax during the year. This is a summary of the employee’s tax deducted and paid during the year. This must be done at the end of February each year. If a staffmember leaves during the year, an IRP5 must be issued then instead of on 28 February. A copy of the completed IRP5 must be sent to the SARS office. What tax do employees pay? - Pay-as-you-earn (PAYE) ta x must be calculated on employees’ ‘net remuneration’ according to the tables prescribed by SARS. PAYE is payable on an excess above R60 000 (currently) of an employee’s All material copyright Nedbank 2004 51 remuneration. This threshold figure can change from time to time depending on the Minister of Finance, who declares adjustments in his annual budget speech in February. ‘Net remuneration’ is an employee’s gross remuneration including fringe benefits less allowable deductions. - SITE is payable on the first R60 000 of an employee’s annual remuneration according to the annual tables prescribed by SARS. PAYE must be paid over to SARS within 7 days of the end of the month within which the tax was deducted. An EMP 201 form must be completed and submitted to the SARS office together with the payment. - Remember, PAYE is payable on any allowances, e.g. travel allowances, granted to staff. 2.6 UIF This fund provides benefits for unemployed workers. You will need to register for UIF any staff who work for you for more than 24 hours a month. The contribution amount is 2% of the employee’s earnings. The staff member contributes 1% and your business contributes the remaining 1% in addition to their remuneration. All material copyright Nedbank 2004 52 You will need to pay this monthly to the UIF/SARS within 7 days of the end of the month and submit your return on a SARS EMP 201 form. You will also need to notify SARS of any staff who leave during the year and the effective date of their termination of service with the Fund. Failure to make payment and submit returns in good time will result in penalties and interest being levied. A ‘blue’ card is no longer issued to employees who are members of the Fund. This card has been replaced by a regulated form issued to the employer by SARS as proof that employees are members. 2.7 Skills development le vy The Skills Development Levies Act, Act 9 of 1999, established a compulsory levy payable by most businesses for the purpose of funding education and training. SARS is responsible for collecting these levies from you. The amount payable is calculated as being 1% of your gross remuneration paid to staff. (This includes staff below the tax threshold.) A monthly return on the prescribed EMP 201 form must be submitted to your local SARS office monthly by the 7th after the month-end. 2.8 Workmen’s compensation The Workmen’s Compensation Act requires employers to insure their staff against accidents or illness that could result in death or disability while working for your All material copyright Nedbank 2004 business. Remember, your staff 53 are the most important asset of your business. Therefore, you are both legally and duty-bound to protect them. You must register with the Compensation Fund and make annual contributions based on a percentage of the annual remuneration paid to your staff. The assessment rate depends on the nature of your business and is determined annually by the Compensation Fund. This protects you as an employer. You will be covered in the event of an accident or injury while the employee is on duty and you are also protected against any civil claims arising from injury or alleged negligence. 2.9 Insurance and assurance Insurance is an essential aspect of your business. Your insurance broker will be able to assess what is important to cover and at what level. The various aspects of short- term insurance include the following: - Fire - Buildings - Office content - Business interruption - Accounts receivable - Theft - Money - Glass - Fidelity - Goods in transit - Business all risks - Accidental damage All material copyright Nedbank 2004 54 - Public liability o Product liability o Defective workmanship o Employer’s liability - Stated benefits - Group personal accident - Motor vehicle - Asset (plant, machinery and equipment) - Electronic equipment - Stock - Fixtures and fittings - Sasria If you are financing assets, the bank will insist on confirmation from your broker/insurance company that your business assets are covered by your short-term insurance policy. They may also ask that their interest as financiers be noted on the policy in the event of damage to the assets and a subsequent claim. Business assurance It is recommended that you consult with a professional broker to assess your assurance requirements in respect of your business, its owners and key staffmembers. Some areas to be investigated include: 1. Deferred compensation This benefit is offered by employers to selected employees. It is a sum of money that will be settled in terms of an agreement between the employer and employee All material copyright Nedbank 2004 at a certain date or on 55 occurrence of a specific event. This is facilitated through an assurance policy. 2. Keyman assurance This is assurance on the life of an employee to compensate the business in the event of their premature death. It guarantees that the business will be compensated for any disruptions to the business, it will protect any existing credit facilities you have in place and provide funds for the recruitment and training of a replacement. The amount of assurance on the life of a key person in order to protect the business against potential loss is always a difficult decision. Unlike an asset, it has no set value. Aspects you could take into account are: - Annual salary - The number of years it will take for a replacement to reach the key person’s current level of profitability, taking into account the potential losses to the business while this process occurs. 3. The costs of replacing a key person. Buy-and-sell agreement This is an agreement whereby the parties of a business enter into an agreement upfront to effect life policies on each other’s lives. This is to protect the business against untimely deaths (or disabilities) so that the surviving parties can buy the affected party’s interest in the business. All material copyright Nedbank 2004 56 4. Restraint of trade agreement These are frequently used by businesses to protect themselves against employees who want to leave and set up business in competition. The amount of cover put in place must bear some relationship to the potential damage that an employee could inflict on the company. 5. Loan account cover Debit loan accounts (loans made by the company to shareholders, directors or employees) and credit loan accounts (loans made by the shareholders to the company) in a company can be covered by assurance. 3 Staff issues The Basic Conditions of Employment Act, Act 75 of 1997 The Act (replacing the Basic Conditions of Employment Act, Act 3 of 1987, and the Wage Act, Act … .. of … .. ) came into effect on 1 December 1998 and sets out the basic conditions of employment. Some of the issues covered by the Act include: - Conditions of employment service - Ma ximum working hours - Maternity, annual and sick leave - Particulars of the termination of employment All material copyright Nedbank 2004 57 - Payment of remuneration, deductions and other statutory requirements concerning the payment of contributions to different funds. - Monitoring and enforcement of the law and legal proceedings. It is imperative that you are familiar with the contents of the Act and its implications for your business. If not managed appropriately, certain situations could result in unnecessary money and time being spent. Employment Equity Act, 1998 The Employment Equity Act is intended to create equal opportunities and fair treatment within the work place for previously disadvantaged individuals. It sets parameters for employment equity and provides guidelines regarding the treatment of staff and unfair discrimination. You should be familiar with the Act and its implications for your business. 4. How do I go about financing my business? What do I want to achieve and how do I go about it? The next issue to consider is how to finance the venture to get it up and running. Different needs for capital could be as follows: 1. Start-up finance to get the business going All material copyright Nedbank 2004 58 2. Finance to keep the business running in its various stages 3. Finance to expand or re-engineer an existing business There are two different forms of finance to consider: 4.1 1. Debt finance 2. Equity finance Debt finance This is the provision of finance by outside parties e.g. a bank who will not have any interest in your business and will be paid on a contractual basis through interest payments and capital repayment. Different types of debt finance could be as follows: 1. Overdrafts 2. Debtor finance/factoring 3. Asset-based finance - Instalment sale agreements - Lease agreements - Rental agreements for your assets 4. Term loans 5. Property finance It is essential that you match the term of the finance with the purpose. What is finance required Duration of finance for? requirements All material copyright Nedbank 2004 Facilities available 59 Working capital Short term Debtors Stock Creditors Overdraft facility Debtor finance Short term Overdraft Terms with your suppliers Plant and equipment Medium term Asset-based finance Vehicles -Instalment sale Setting up costs -Lease Renovation of premises - Rental Term loan Property finance Long term Mortgage Let’s look at some of the forms of finance: 1 Short-term finance 1.1 Overdraft An o verdraft is a facility, payable on demand, granted by a bank on your current account for your short-term financial requirements. This facility could cover the purchase of your initial stock and your debtors and would fluctuate once your trading funds are received. 1.2 Debtor finance/factoring This is normally done by a debtor finance company whereby you are granted a loan against the funds tied up in your debtors book. 2 Medium-term finance All material copyright Nedbank 2004 60 Type of asset finance INSTAL MENT Tax implications SALE assets are being Provided used VAT implications the VAT is in capitalised the upfront. production of Ownership of asset You become the owner of the asset once the debt is settled. income, depreciation and interest payable are allowed as a tax deduction. LEASE Full lease VAT is Ownership payments are capitalised in the bank and at claimable upfront. the end vests of the against pre-tax term of the lease income of the you may elect to business. buy it from the bank, sell it, return it to the bank or refinance it. RENTAL Full rentals are VAT is payable Ownership claimable on each rental in the bank and at against pre-tax payment. the end vests of the income of the term of the lease business. you may elect to buy it from the bank, sell it, return it to the bank or refinance it. All material copyright Nedbank 2004 61 The Credit Agreements Act (Act … . of … … ) will determine the maximum period of the loan, depending on the nature of the asset, which changes from time to time. Residuals or balloon payments could also be incorporated into the structure of your agreement. This would ease your cash flow. However, interest is calculated on the full residual/balloon payment until it is due for payment, which could prove to be more expensive. 2.2 Medium-term loan A term loan is finance granted over a period of three to seven years with a structured repayment plan. You could consider applying for a term loan from a bank for one of the following reasons: 6. Renovations to premises 7. Buying or setting up a business A bank would normally require collateral to secure the loan. 2.3. Long-term finance Commercial and industrial property loans are granted in the form of mortgage bonds. This form of finance may be required to purchase an existing property or develop a new one. All material copyright Nedbank 2004 62 4.2 Equity finance Equity finance refers to capital injected into the business by the owners. Money used to finance a startup venture is often referred to as seed capital. This can take the following forms: 1. Capital invested by the owners 2. Loans made to the business by the owners 3. Capital invested by outside parties 4. Retained earnings in the case of existing businesses. This is money invested in a business in return for part of the business. The return is in the form of income or a return on capital. 1. Capital invested by the owners In startup ventures, the founders of the business are expected to provide ‘hurt’ money. If you put your own money at risk in your business it shows outsiders that you are serious about what you are embarking on and that you expect a greater return on your money than you would receive if you invested elsewhere. 2. Loans made to the business by the owners These are often represented in the balance sheet of a business as members’/ shareholders’ loan accounts. These have to be repaid, based on the terms laid out by the owners, and may be interest bearing. This interest, which is paid to the owners for their loans to the business, is a tax deductible expense. A members’/ shareholders’ loan account may also arise from profits made by the business but not taken by the members/shareholders when reinvested in the business. All material copyright Nedbank 2004 63 3. Capital invested by outsiders External finance could be another form of equity finance. These are funds sourced from ‘business angels’, i.e. people who invest in your business and provide capital in return for a return on their capital. Business angels do not expect a share in your business. 5 WHAT WILL THE BANK REQUIRE FOR AN APPLICATION FOR FINANCE? In assessing your application, the following aspects are taken into account: 1. The owners of the business and their financial strength. 2. What experience/qualifications do they have? 3. How long has the business been in existence? 4. Nature of your business and the type of industry you are invol ved in. 5. Who are your customers? 6. Who are your suppliers? What documents should I provide the bank with? 1. Financial statements/management accounts if the business is already trading 2. Statement of assets and liabilities for the owners of the business. 3. A copy of your business plan if you are requesting funds to set up the business. It is common practice for the bank to ask for security for your facility. All material copyright Nedbank 2004 64 Security is collateral, which could be in the form of an investment, assurance policy or equity in your property. This is requested to ensure a greater commitment from you to meet your obligations in terms of the facility and also to reduce the risk for the bank. Common sources of security are as follows: 1. Personal suretyships from the owners of the business. This is where an individual undertakes to repay a loan if the borrower does not repay it when called upon to do so. 2. Covering mortgage bonds over property. A bank might register a covering mortgage bond over a property to secure a facility, provided there is sufficient value in the property. 3. Notarial bond over movable assets. This is similar to a mortgage bond, but the underlying assets for the facility are movable. This form of collateral is not favoured by banks for normal borrowings. 4. A bank can take cession of investments such as listed shares, bank deposit accounts, unit trusts and investments. 5. A bank can take cession of assurance policies, provided they have sufficient cash values to secure borrowings. 6. A bank may also take a cession of your debtors book as security for finance. The bank’s exposure would be based on the calibre, quality and age analysis of your debtors book. A percentage of the total debtors book is normally granted as a facility. 6. How do I analyse my financial statements? What do I look for? What is a balance sheet and what does it mean to m y business? A balance sheet is a snapshot of your business at a given moment (normally your financial year-end). It details the non-trading side of your All material copyright Nedbank 2004 65 business i.e. assets, liabilities and the net worth of the business. Current assets include cash at bank, stock and debtors, while fixed assets include buildings and equipment. Liabilities are split into current liabilities (must be repaid within one year) and long-term liabilities, which would be longterm loans and the finance on properties, equipment etc. The difference between the assets and liabilities is the net worth of your business. What is an income statement and what does it mean? This is a profit or loss statement reflecting your trading record for a given period. It is a good idea to produce this on a monthly basis so that you can identify problems and address them in good time. The income statement shows your sales and costs and determines a net figure at the end of the period showing a profit or loss. What is a cash flow projection? Cash flow is the life-blood of your business. A lack of control in collecting outstanding money, even if you are making your sales targets, could paralyse your business. The cash flow projection will show when money is flowing in and out of your business and will highlight the existence of additional funding requirements. Example of a balance sheet and income statement of a hypothetical close corporation NODDY’S CC Income statement for the year ended 31 December All material copyright Nedbank 2004 66 2003 2002 R’000 R’000 Gross revenue 3 074 2 567 Cost of sales 2 088 1 711 Gross profit 986 856 Expenditure 568 553 - Selling expenses 100 108 - General and administrative expenses 194 187 35 35 - Depreciation expense 239 223 Profit before taxation 418 303 94 64 Profit after ta x 324 239 Retained profits at beginning of the year 221 167 Retained profits at end of year 545 406 - Lease expense Tax Balance sheet for year ended 31 December All material copyright Nedbank 2004 67 2003 2002 R’000 R’000 Property, plant and equipment 2 374 2 266 Current assets 1 155 953 289 300 363 288 3 529 3 219 Members’ interest 100 100 Distributable reserve 545 406 Members’ loans 1 241 1 263 Borrowings 1 023 967 Trade and other payables 382 270 Taxation 238 213 ASSETS Non-current assets Inventories Accounts receivable 503 365 Bank balances Total assets MEMBERS’ INTEREST AND LIABILITIES Members’ interest and reserve Non-current liabilities Current liabilities Total members’ interest and liabilities All material copyright Nedbank 2004 3 529 3 219 68 6.1 What is leverage? Leverage results from the use of fixed operating and financial costs by the business to maximise the returns to the owners of the business. Changes in leverage result in a change in the level of return to the owners and associated risk. Generally, increases in leverage result in increased return and risk, whereas decreases in leverage result in decreased return and risk for the owners. The amount of leverage in the capital structure of a business (the mix of long-term debt and equity maintained by the business) can significantly impact on its value by affecting return and risk. These risks are almost completely controlled by management e.g. the fixed-costs assets. Because of its effect on the value of the business, the owner must understand how to measure and evaluate leverage, especially when attempting to create the best capital structure. Your accountant will be able to help you with this and give you the optimal capital structure within which your business will best operate. 6.2 Breakeven analysis Breakeven analysis is probably one of the most important ratios you will use in planning and assessing the outcomes of different cash flow scenarios. It will determine the level of operations necessary to cover all your operating costs and will also evaluate the profitability associated with different levels of sales. At the breakeven point, your earnings before interest and tax will be zero. All material copyright Nedbank 2004 69 The first step in determining the breakeven point is to divide your expenses into fixed and variable costs. Fixed costs do not depend on your sales e.g. rental and lease agreements, while variable costs vary directly with sales e.g. cost of supplies. Breakeven = Total fixed costs Selling price – variable cost e.g. Let’s assume that, for our example above, Noddy’s CC has fixed operating costs of R2 500,00 and its sales price per product is R10,00. Its variable cost per unit is R5,00. Breakeven = R2 500,00 . = 500 units R10,00 – R5,00 This means that, before it makes one cent of profit, Noddy’s has to sell 500 units to break even and cover its fixed overheads. 6.3 How ‘liquid’ is my business? The liquidity of a business is measured by its ability to meet its short-term obligations as they fall due. Remember, for all three ratios, the higher the value, the more liquid the business and the better you are equipped to meet your short-term debts. Having said this, there is a cost involved for a business to be liquid. This is because current assets are less profitable than fixed assets and current liabilities are a more expensive source of financing than long-term financing. This needs to be actively managed for your business to operate at its most efficient level. All material copyright Nedbank 2004 70 The three basic measures of liquidity are: - net working capital - the current ratio - the quick (acid-test) ratio 6.3.1 Net working capital Although not an actual ratio, this formula is often used to measure the overall liquidity of a business. It is calculated as follows: Net working capital = current assets – current liabilities The net working capital for Noddy’s CC is : R1 155 000 – R144 000 = R1 011 000 for 2003 This figure is not used in comparing the performance of different businesses but is useful for internal control. 6.3.2 The current ratio The current ratio measures the liquidity of a business and the ability of the business to meet its short-term debts. Current ratio = Current assets Current liabilities The current ratio of Noddy’s CC for 2003 is: All material copyright Nedbank 2004 71 R1 155 000 = 1,86 R620 000 The current ratio acceptability is normally 2, but this varies for different industries. It means that you have two times cover for current assets for every current liability. It is also useful to note that, if a company’s current ratio is 1, its net working capital is zero. If the current ratio is less than 1, it will have a negative net working capital. 6.3.3 Quick (acid-test) ratio This formula also measures the liquidity of a business but excludes inventory from the formula. Inventory is not taken into account as it is generally seen as the least liquid asset in a business. This is because inventory sometimes consists of partially completed items, obsolete items and special-purpose items and is often sold on credit, which means it becomes a creditor before being converted into cash. Quick ratio = Current assets less inventory Current liabilities The quick ratio for Noddy’s CC is : R1 155 000 – R289 000 = 1,40 R620 000 A quick ratio of 1 or more is generally acceptable depending on the industry you operate in. This ratio provides a better measure of overall All material copyright Nedbank 2004 72 liquidity only when the inventory is not easily converted into cash in a business. If the inventory turns over frequently for your business, it would better to gauge your performance using the current ratio. 6.4 How do I analyse the activity in my business? Acti vity ratios can be used to assess the speed with which current accounts i.e. inventory, debtors and creditors are converted into cash in your business. You can use the following formulas: - Inventory turnover - Average collection period - Average payment period - Fixed-asset turnover - Total asset turnover 6.4.1 Inventory turnover This measures the activity and liquidity of the inventory of a business. It is calculated as follows: Inventory turnover = Cost goods sold (cost of sales) Inventory on hand For Noddy’s CC the inventory turnover will be: R2 088 000 = 7,2 R289 000 All material copyright Nedbank 2004 73 The resulting figure is only useful when compared with that of similar businesses in the industry or with the past inventory turnover of your business. An inventory turnover of 20 would be acceptable for a grocery shop, but an inventory turnover of 4 would be more acceptable for an aircraft manufacturer. 6.4.2 Average collection period This formula is useful when evaluating credit and collection policies in your business. The formula is calculated as follows: Average collection period = Debtors Average sales per day = Debtors Annual sales/360 The average collection period for Noddy’s CC is: R503 000 = 58,9 days R8 539 000 (R3 074 000/360) Therefore it takes on average 58,9 days to collect money from a debtor. This formula is only meaningful in relation to the terms granted by the business to its debtors. If, for instance, Noddy’s CC extends only 30-day terms to its debtors, an average collection period of 58,9 days indicates that the debtors book is poorly managed and stricter controls could be implemented. Of course, the longer collection period could result from an intentional relaxation of credit term enforcement due to competitive pressure. If the business had a 60-day credit term arrangement with its All material copyright Nedbank 2004 74 debtors, the average collection period of 58,9 days would indicate that good controls are in place to manage the debtors book. It is worth mentioning that the longer your average collection period, the more expensive your inventory holding cost. 6.4.3 Average payment period The average payment period is calculated as follows: Average payment period = Creditors Average purchases per day = Creditors Annual purchases/360 The difficulty in calculating this ratio stems from the need to find your annual purchases as this is not a part of your financial statements. Ordinarily, purchases are estimated as a given percentage of your cost of sales. If we assume that Noddy’s CC’s purchases were equal to 70% of its cost of sales, its average payment period would be: R382 000 70% x R2 088 000/360 = R382 000 = 94,1 days R4 060 000 These figures are only meaningful in relation to the credit terms granted to the business. If Noddy’s CC was granted on average 30-day credit terms by its suppliers, the 94,1 days would indicate poor management of the payment of its creditors. If the business generally has a 90-day credit term arrangement with suppliers, this would indicate that strict controls are in place with regard to creditor payments. If a business is looking to All material copyright Nedbank 2004 75 source outside finance, prospective lenders would be particularly interested in seeing what the outcome of this ratio would be as it would give an indication of your recent payment history. 6.4.4 Asset turnover This ratio measures the efficiency with which your business has been using its fixed or income-producing assets to generate sales. The formula is calculated as follows: Fixed asset turnover = Sales Property, plant and equipment The fixed-asset turnover for Noddy’s CC for 2003 would be as follows: R3 074 000 = 1,29 R2 374 000 Therefore the business turns over its net fixed assets 1,29 times a year. Generally higher fixed-asset turnovers are preferred, since they reflect greater efficiency of fi xed-asset utilisation. 6.4.5 Asset turnover Total asset turnover indicates the efficiency with which the business uses all its assets to generate its sales. Generally the higher the total asset turnover of the business, the more efficiently its assets are being used. This measure is probably of greatest interest to management as it indicates whether the operations of the business are financially efficient. All material copyright Nedbank 2004 76 Total asset turnover = Sales Total assets The value of Noddy’s CC’s total asset turnover for 2003 is: R3 074 000 = 0, 87 R3 529 000 Therefore the business turns over its assets 0,87 times a year. 6.5 Analysing debt within your business and what it means The debt position of a business indicates the amount of other people’s money being used to generate profits. Prospective lenders are particularly interested in the degree of indebtedness and ability to repay debts, since the more indebted the business, the higher the probability that it will be unable to satisfy the claims of all its creditors. Management of the business must be concerned with indebtedness in recognition of the attention paid to it by other parties and in the interest of keeping the business solvent. In general, the more debt a business uses in relation to its total assets, the greater its financial leverage (the magnification of risk and return introduced through the use of fixed-cost financing such as debt). In other words, the more fixed-cost debt a business uses, the greater will be its risk and expected return. There are two types of debt measurement: All material copyright Nedbank 2004 77 6.5.1 The degree of indebtedness measures the amount of debt relative to other significant balance sheet items. 6.5.2 The ability of a business to service debts refers to its ability to make contractual payments required on a scheduled basis over the life of a debt. There is also a coverage ratio which prospective lenders would assess before lending money to a business. This measures the ability of a business to meet contractual interest payments e.g. on a lease. 6.5.3 Times interest earned ratio 6.5.1 Debt ratio The debt ratio measures the proportion of total assets financed by the creditors of the business. The higher this ratio, the greater the amount of other people’s money being used to generate profits. Debt ratio = Total liabilities Total assets The debt ratio for Noddy’s CC for 2003 is: R2 884 000 = 0,8172 = 81,72% R3 529 000 All material copyright Nedbank 2004 78 This indicates that the business has financed 81,72% of its assets with debt. The higher this ratio, the higher the financial leverage of a business i.e. the greater the risk and potential return for the business. 6.5.2 Debt-equity ratio The debt-equity ratio indicates the relationship between the long-term funds provided by creditors and those provided by the owners of the business. It is commonly used to measure the degree of financial leverage of the business and is calculated as follows: Debt-equity ratio = Long-term debt Owners’ equity The debt-equity ratio for Noddy’s CC for 2003 is: R1 023 000 = 0,5424 = 54,24% R1 886 000 Therefore the long-term debts of the business are only 54,24% as large as the owners’ equity. This figure is really only meaningful in light of the line of business. Businesses with large amounts of fixed assets, stable cash flows, or both, typically have high debt-equity ratios, while less capitalintensive businesses, those with volatile cash flows, or both, tend to have lower debt-equity ratios. 6.5.3 Times interest earned ratio All material copyright Nedbank 2004 79 The times interest earned ratio measures the ability of the business to make contractual interest payments. The higher the value of this ratio, the better able the business is to fulfil its interest obligations. If you are applying for outside finance for your business, the bank will be particularly interested in this ratio as it will give them an idea of how you will pay them back. The time interest earned ratio is calculated as follows: Times interest earned = Earnings before interest and tax Interest Applying this ratio to Noddy’s CC yields the following value for 2003: Times interest earned = R418 000 = 4,5 R93 000 As a rule, a value of at least 3 and preferably closer to 5 is suggested. This means for Noddy’s CC that if its earnings were to shrink by 78%, the business would still be able to pay its interest obligations. This is a good margin of safety for the business. 6.6 Analysing the profit of your business The profitability of a business can be assessed relative to sales, assets or equity. Without profits a business would not be able to attract outside capital and, moreover, present owners and creditors would become concerned about the future of the business and their ability to reco ver their funds. All material copyright Nedbank 2004 80 The ratios used to measure the profitability of your business are: 1. Gross profit margin 2. Operating profit margin 3. Net profit margin 4. Return on total assets (roa) 5. Return on equity (roe) 6.6.1 Gross profit margin The gross profit margin measures the percentage of each sales amount remaining after the business has paid for the cost of its goods. The higher the gross profit margin, the better and the lower the relative cost of goods sold. The ratio is calculated as follows: Gross profit margin = Sales – cost of goods sold = Gross profits Sales Sales The value for Noddy’s CC gross profit margin for 2003 would be: R3 074 000 – R2 088 000 = R3 074 000 R986 000 = 32,1% R3 074 000 This figure is lower than the gross profit margin of 33,3% for 2002 and the owners would need to investigate the reasons for this decline. 6.6.2 Operating profit margin All material copyright Nedbank 2004 81 The operating profit margin measures what are often referred to as ‘pure profits’ earned on each rand sold. Operating profits are pure in the sense that they ignore any financial or government charges (tax and interest) and measure only the profits earned on operations. A high operating profit margin is preferred. The operating profit margin is calculated as follows: Operating profit margin = Profit before taxation Sales The value for Noddy’ CC is: R418 000 = 13,6% R3 074 000 A comparison with industry norms would be valuable in this case. All material copyright Nedbank 2004 82 6.6.3 Net profit margin The net profit margin measures the percentage of each rand of sales remaining after all expenses have been deducted. The higher the net profit margin, the better for the business. The net profit margin is a commonly cited measure of the success of a business. ‘Healthy’ net profit margins differ considerably across industries. A net profit margin of 1% or less would not be unusual for a grocery store, while a net profit margin of 10% would be low for a retail jewellery store. The net profit margin is calculated as follows: Net profit margin = Net profits before taxation Sales] Noddy’s CC net profit margin for 2003 is: R418 000 = 13,60% R3 074 000 A comparison with industry norms would be valuable in this case. 6.6.4 Return on total assets (roa) The return on total assets, which is often called the return on investment of the business, measures the overall effectiveness of management in generating profits with the available assets. The higher the return on total assets, the better. The return on total assets is calculated as follows: All material copyright Nedbank 2004 83 Return on total assets = Net profits after taxation Total assets Noddy’s CC return on total assets in 2003 is: R324 000 = 9,18% R3 529 000 This shows that the return on its investment is 9,18% A comparison with industry norms would be valuable in this case. 6.6.5 Return on equity (roe) The return on equity measures the return earned on the owners’ equity in the business. Generally, the higher this return, the better off the owners are. Return on equity is calculated as follows: Return on equity = Net profits after taxes Owners’ equity This ratio for Noddy’s CC in 2003 is: R324 000 R1 886 000 = 17,18% A comparison with industry norms would be valuable in this case. All material copyright Nedbank 2004 84 7. WHAT CONTROLS DO I NEED TO HAVE IN PLACE? Having the right controls and systems in place could be decisive for the success of your business. The only way to keep track of how your business is performing is to introduce an effective bookkeeping method with accurate financial information. There are basically three facets of control that need to be implemented and maintained at all times. Internal controls This is your system of checks and balances to ensure that all actions in your business are in accordance with your business objectives, e.g. ensuring production line efficiency by monitoring quality and consistency. A typical control would be to monitor the number of defective products produced. Administrative controls These methods and procedures facilitate management and planning and the control of your operations, e.g. management of your debtors book, analysis of its age, and collection of outstanding monies. Accounting controls These are methods and procedures implemented in your business to authorise transactions, safeguard assets and ensure the accuracy of financial records, e.g. weekly/monthly physical inventory count. 7.1 Inventory Due to the movable nature of inventory your controls over this asset need to be extremely tight. A monthly inventory count is a minimum requirement. Should you be in an industry where inventory moves daily, it All material copyright Nedbank 2004 85 would be advisable to do daily inventory counts. Unfortunately the temptation to steal exists in any business.Exercising tight controls will reduce the risk and temptation to steal. Bear in mind that it can take a multiple of turnover to create a fraction of the net profit. Exercising strict ‘receiving’ controls and inventory input controls as well as regular stock counts will assist in minimising potential losses. 7.2 Debtors It is very attracti ve to gain new customers and grow your business, but the quality of the customers is vital to positive growth. Whenever you decide to provide credit payment terms to your customers, it is imperative that you apply these controls: − Request your bank for a ‘full general’ report on your potential customer, indicating their payment ability over the period of credit you wish to grant. You could be offering your customer 30 days, 60 days or 90 days. Bear in mind that the longer you provide credit, the more expensive your product becomes as you are now financing your customer’s purchase. You need to factor this into your product cost when determining your pricing. − Analyse your debtors book on a monthly basis to ensure that customers are paying within the agreed period. Should a customer ‘slip’ from 30 days to 60 days, it is the first sign that there may be payment difficulties. Ensure that you contact these customers immediately in order to make new arrangements regarding the outstanding balance. The two key messages regarding debtors are: All material copyright Nedbank 2004 86 − It is of no benefit to your business to have a huge debtors book with few customers paying. − You finance your debtors book. The higher your debtors book, the higher your cost, hence the more costly (to your business) your product. 7.3 Creditors From a cash flow perspective it is attractive to gain as much credit as possible, but the ‘evil day’ will come when you will have to pay outstanding accounts. This is an efficient mechanism to create short-term liquidity for your business, but it should not be allowed to run out of control. As attractive as credit terms are, you need to maintain sufficient control to ensure that your creditors can be settled by the business at any time. This is a common cause of insolvency among many businesses. Control is necessary to ensure that your short-term creditors never exceed your short-term debtors and your cash flow is sufficient to meet all shortterm obligations. 7.4 Role of the financial officer Your accountant and/or financial manager plays an integral part in your business and you should nurture the relationship. Their role should encompass the following: 7.4.1 Financial management Weekly/Monthly reports should be produced showing the activity of the business so that any errors can be identified in good time for rectification and any opportunities identified as well. Monthly income statements All material copyright Nedbank 2004 87 should be produced as well as management accounts to enable you to manage your business. 7.4.2 Financial competence - All controls to be efficiently implemented and maintained. - Financial requirements to be determined in good time to prevent a cash flow crisis. - Effective management of monthly accounts, creditor payments and debtor collections. 7.4.3 Another view It is strongly recommended that a qualified financial adviser or accountant be appointed to review your financial statements periodically. In managing a business, one often has a single view of the operation which can hamper the identification of opportunities and threats. Having ‘another view’ creates an additional, objective perspective of your business, which invariably provides refreshing input. 7.4.4 Financial review This is the role of your accountant who will conduct an annual review of your financial accounts and business plan. 7.5 Budgets All material copyright Nedbank 2004 88 Budget forecasting is an effective planning tool. It forms the basis of marketing, sales and operational effectiveness, which creates parameters within which to achieve your desires, goals and objectives. Budgets are based on historical data as well as future strategies. The various budgets to draft are as follows: Sales budget Operating expenses budget Purchases budget Capital expenditure budget Cash flow projection 8. WHAT RISKS SHOULD I BE AWARE OF? 8.1 Competitors The need to monitor competitor activity is paramount. Competitors may be enhancing a product and the manufacturing, marketing or delivery thereof, which could result in your business losing market share. A further advantage of competitor analysis is the knowledge gained. You may well identify an opportunity in your competitor’s business that may be exploited or enhanced, which would result in an increased market share for you. 8.2 Pricing All material copyright Nedbank 2004 89 A regular review of your pricing strategy will enable your business to remain competitive in the market place. Some review questions are as follows: − Is my product competitively priced? − Do I need to make product, process or marketing adjustments to ensure competitive pricing? − Is my product priced too competitively, i.e. too low? The answers to the above questions may necessitate in a review and change to your current strategy. 8.3 Inflation Inflation has become a part of South African business life and has a significant impact on consumer spending. Monitoring the movement of inflation will enable you to assess the consumer’s propensity to spend. Should inflation rates move down, it would suggest an easing of interest rates and hence a propensity for consumers to borrow and spend more. The converse applies in an environment of increasing interest rates. For example, a retailer would have a good indication as to whether or not a profitable festive season could be expected if inflation rate movements were understood. Again the direction of inflation (up or down) may necessitate a review and change to your current strategy. 8.4 Foreign exchange This is particularly important to import and export businesses. If your business imports or exports products, supplies, parts or materials, its profitability could be severely impacted by movements in exchange rates. An importer of goods would be negatively impacted by a deterioration in All material copyright Nedbank 2004 90 the rand, as the imported goods would cost more. An example will illustrate the impact: Month One 1 000 units imported at USD1,00 per unit @ R6,40 = R6 400,00 Month Nine 1 000 units imported at USD1,00 per unit @ R7.10 = R7 100,00 This would result in a loss of R700,00 on that consignment of goods, which directly impacts on your unit cost. The impact of a strengthening of the rand would have the converse effect. Conversely an export business will be positively affected by a deterioration of the rand. An e xample will illustrate the impact: Month One 1 000 units exported at USD1,00 per unit @ R6,50 = R6 500,00 Month Nine 1 000 units imported at USD1,00 per unit @ R7,50 = R7 500,00 This would result in a net gain of R1 000,00 on the same consignment of goods. The impact of a strengthening of the rand would have the converse effect. The movement of exchange rates could well require a reassessment of your current strategies and necessitate change in order to remain competitive. All material copyright Nedbank 2004 91 9 WHAT SHOULD I CONSIDER IF I AM EXPANDING MY BUSINESS? 9.1 Funding As your business begins to grow, the need for additional cash resources increases greatly. The decision as how to finance the growth is vital to the success of the business. There are several forms of funding, namely: − Loan funds from the members, directors or sole proprietor − A capital injection from a new shareholder − A bank loan. All of the above ha ve an associated cost. Loan funds require the owners of the business to forego their hard-earned cash. A new shareholder requires the current owners to part with a share of the business. A bank loan costs you interest. The key message in this regard is to assess the real cost of the additional funding requirement. A bank loan may appear to be the most attractive option as the owners of the business do not forego personal funds nor do they lose any portion of the business. However, your business may not be able to fund the additional interest expense, which may cost you the entire business in the long run. 9.2 Market potential Investigate whether the market has the propensity to sustain your intended growth. You do not want to scale up resources, equipment and machinery and discover at a later stage that the market does not exist for your projected sales. All material copyright Nedbank 2004 92 9.3 Capacity and resources Ensure that your business has adequate resources to produce sufficient supply to meet the expected demand. These resources are supplies and materials, staff and training, equipment and machinery, marketing, distribution channels and process efficiencies. 9.4 Legislation Ensure that you are aware of any legislative changes that will impact on your business. Labour legislation has been amended regularly in the last decade, which could have a significant impact on your business. 9.5 Economy Economic data is released on a regular basis and provides you with an indication of the economic growth rate of the country. Again, this is indicative of the propensity for consumer spending, which would impact on your intended growth plans. 9.6 Return on investment The most important aspect of your growth plan is to ensure that you have an acceptable return on your investment. Your business needs to ensure that the return on your investment outperforms the cost of your funding. The guidance of an accountant/financial adviser would assist in projecting a cash flow analysis that would provide your business with an acceptable return on investment. All material copyright Nedbank 2004 93 When planning for any form of growth in your business it is strongly recommended that a review of your business plan be conducted to ensure that every aspect of your business is adequately equipped to meet the demands of your planned growth. 10 Retirement planning You need to start planning for your retirement early on and update your financial plan as your business grows and expand. This area of a person’s life is neglected at their peril. There are many different retirement vehicles available. A credible financial adviser will assist you to plan for your future. Your personal retirement plan should be updated annually. Do you have a valid will and, if so, is it up to date? Are your affairs in order for your survivors if you were to pass on tomorrow? These are questions we dread asking ourselves, but they are vital. Firstly, a valid will is essential to ensure that your survi ving family will be cared for as you would have wished and that your intentions for their future are carried out. Financial tax planning is also essential. You can start from a early age, minimising the tax (estate duty) payable on your estate so that the maximum benefit is left to your survivors. You are currently granted an abatement of R1 500 000,00 on your estate on your death and the balance is taxed in the form of estate duty at a current rate of 20%. It is a good idea to consult with your financial adviser about various options to minimise the growth in your personal estate and to limit the estate duty payable on your death. All material copyright Nedbank 2004 94 SECTION C: OTHER MATTERS TO CONSIDER 1. 1. Black economic empowerment 2. Protecting your intellectual property 3. Donations tax 4. Capital gains tax 5. Retention of records Black economic empowerment (BEE) It has been established that South Africa requires a focused BEE strategy to achieve ‘broad-based’ economic empowerment of black persons (blacks, Coloureds and Indians). This will lead to growth, development and stability in South Africa. Some of the key objectives of the BEE strategy are as follows: 1.1 Increase in the number of black people who own and control existing and new businesses. 1.2 Increase in the number of new black businesses. 1.3 Increase in the number of black people in executive and senior management positions of businesses in all sectors. 1.4 An increased proportion of ownership and management of economic activities in community and broad-based businesses i.e. trade unions, employee trusts and collective enterprises. All material copyright Nedbank 2004 95 1.5 An increase in the ownership of land, assets, improved access to infrastructure, acquisition of skills and participation in productive economic activities in under-developed regions. 1.6 Enhanced and shared economic growth. 1.7 An increase in income levels of black persons and a levelling of income between and within different race groups. It is imperative that you are aware of the content of the BEE strategy and its implications for your business. 2 Protecting your intellectual property The law provides for the protection of your intellectual property through the following vehicles. It is imperative that you consult with an attorney who specialises in patents, copyrights, trademarks, registered design trademarks and licensing thereof if you feel that it is relevant in your business. 2.1 Patents The Patents Act, Act 57 of 1978, regulates patents. A patent is issued by the Patent Office for 20 years and protects your invention from anyone who intends of copying it. 2.2 Registered designs The Designs Act, Act 195 of 1993, can protect specialist designs from anyone who intends copying it. 2.3 Trademarks All material copyright Nedbank 2004 96 A trademark means words or a design unique to the goods or services of a business that distinguish it from other suppliers or manufacturers. Trademarks can be registered over these words or designs for 10 years. 2.4 Copyright The law of copyright protects literary, musical and artistic works, computer programmes, broadcasts, sound recordings and films. 2.5 Licensing This is a right given by an owner of intellectual property to another party by means of an agreement for the use of the intellectual property. 3. Donations tax Donations tax is payable by any individual living in South Africa on the gratuitous disposal of property. Principal exemptions include the following: - Donations between husband and wife - Donations to charitable, ecclesiastical and educational institutions - Casual donations up to R10 000 per annum by donors other than natural persons - Donations by natural people exceeding R30 000 per annum - Donations outside South Africa, subject to certain conditions Donations tax is payable within three months of the donation at a flat rate of 20%. 4. Capital gains tax All material copyright Nedbank 2004 97 Capital gains tax is payable on the disposable of assets that take place after 1 October 2001. This applies to all assets, including offshore assets. The amount of the capital gain to be taxed is calculated as the difference between the proceeds of the sale and the base cost of the asset. The base cost of an asset refers to the cost of acquiring the asset, including costs thereof. In respect of natural persons, a R10 000 per annum exclusion applies and the exclusion is R50 000 in the year of a natural person’s death. The capital gain is included in the taxable income of person/entity who made the capital gain and taxed at the normal income tax rates applicable. 5. Retention of records It is important to note that records pertaining to your business must be kept for periods specified by SARSR for inspection at any time. Any documentation relating to potential capital gains tax transactions should be retained indefinitely. The time frames for other documents are as follows: 5.1 Books of prime entry - Cash books, ledgers, asset registers, journals and all supporting schedules to these accounts should be kept for 15 years. - Vouchers, bank statements, invoices and statements, goods received notes, salary registers, sales tax records, tax returns and tax assessments should be kept for five years. 5.2 Employee records - Expense accounts, payrolls, tax returns etc. should be kept for five years. All material copyright Nedbank 2004 98 - Accident reports, training records, staff records should be kept for three years. 5.3 Statutory and share records - All business documentation, such as certificates of change of name, founding statements and articles of association, should be kept indefinitely. - Registers of directors and officers, directors’ interests, members, pledges and bonds and details of all company share transactions should be kept for 12 years. SECTION D SMALL BUSINESS SERVICES calendar VAT return 25th day of the month following the end of the tax period RSC returns 20th, monthly UIF 7th, monthly PAYE 7th, monthly SDL 7th, monthly Workmen’s compensation 31 March IRP5 forms 29 April End of financial year for End of February individual tax payers Individual tax returns due End of Ma y Close corporation and private 60 days after financial year-end company tax returns due Provisional tax returns due for 31 August individuals All material copyright Nedbank 2004 99 1st 28 February 2nd 30 September 3rd Provisional tax returns for close corporations and private companies Six months before financial 1st year-end 2nd At financial year-end 3rd Six months after financial yearend (seven months, if the financial year-end is February) Annual budget speech February annually Medium-term budget speech October/November annually GDP supply-side figures Quarterly in February, Ma y, August and November Monetary Policy Committee Scheduled for 2004: meetings 1. 26, 27 February 2. 21 and 22 April 3. 9 and 10 June 4. 11 and 12 August 5. 13 and 14 October 6. 8 and 9 December South African Reserve Bank Quarterly in March, June, Quarterly Bulletin September and December SECTION E SMALL BUSINESS SERVICES dictionary A All material copyright Nedbank 2004 100 Accounting controls Methods and procedures implemented in your business for authorising transactions, safeguarding assets and ensuring accuracy of financial records Accounting equation Accounting ratios Assets = Liabilities plus equity Measurement techniques used to analyse and compare the performance of businesses Accrual An accounting term which acknowledges that an expense has been incurred but is not yet due for payment e.g. interest calculated monthly but only paid quarterly Acquisitions A business acquires a target business which complements their current product/service offering Administrative controls Methods and procedures that facilitate management, planning and the control of your operations All risks Applies to accidental damage cover provided by an insurance policy e.g. damage caused by a flood or fire Assets These are items used in the production of income for a business by offering a service or All material copyright Nedbank 2004 101 producing products. They have a monetary value and are owned by the business. Audit An examination accounting and records verification of a business of the by a registered accounting and auditing firm. This is compulsory for a private company. B Backward integration A form of a diversification strategy e.g buying an accounting recruitment agency Balance sheet A snapshot of your business at a given moment (normally your financial year-end). It details the non-trading side of your business i.e. assets, liabilities and the net worth of the business. Current assets include cash at bank, inventory and debtors while fixed assets include buildings and equipment. Liabilities are separated into current liabilities (must be repaid within one year) and long-term liabilities which would be long-term loans and finance on properties, equipment etc. Balloon payment or residual A pa yment due at the end of an instalment sale agreement/lease agreement or rental agreement. This results in lower repayments and can aid cash flow but is a more expensive option. All material copyright Nedbank 2004 102 Bank reference An enquiry made to a bank about the ability of a business to meet a specified commitment over a period of time Back-to-back guarantee A guarantee issued by the issuing bank to a beneficiary bank as collateral for banking facilities granted by the beneficiary bank of a mutual client Backward integration This is a form of diversification for growing a business, e.g. buying a company that would make use of your current offering. Bill of lading A document issued by a shipping company to the shipper which acts as an acknowledgement that the goods are on board the ship. It provides details of the goods, ship and port of destination. It evidences the contract of carriage and conveys title to the goods. Break-even Will determine the level of operations necessary to cover all your operating costs and will evaluate the profitability associated with different levels of sales. A break-even analysis focuses on the relationship between fixed costs, variable costs and profit. Building sum insured Relates to the costs of re-establishing your building, outbuilding and walls together with All material copyright Nedbank 2004 103 permanent fixtures in the event of an insurable loss. Business angels Refers to individuals who invest in businesses without taking ownership. Business description This describes the nature of your business activities. Business interruption Insurance which will cover your business in the event of a loss of profits due to an interruption to the business Business plan A business document which outlines a road map for the past, present and future. It is a key business tool. Buy-and-sell agreement An agreement entered into by the parties of a business in terms of which they effect life policies on each other’s lives. This is to protect the business against untimely deaths (or disabilities) so that the surviving parties can buy the affected party’s interest in the business. All material copyright Nedbank 2004 104 C Call account A cash deposit banking account. Capital Represents the funds injected into the business by the owners. It includes their original investment in the business and any profits less any losses and is included under the long-term liabilities of the balance sheet. Capital expenditure Payments made from a business for acquiring fixed assets Capital gains tax (CGT) A ta x on gains made from the disposal of assets Cartel A group of companies or countries who collectively and illegally attempt to affect market pricing by controlling production and marketing Cash flow statement A part of your financial statement which indicates the flow of cash through the business. It identifies how cash was generated, how it was used and what the cash situation is at the date of the statement. All material copyright Nedbank 2004 105 Certificate of incorporation This document gives a private company legal existence. Certificate of name change Document issued when a company changes its name. CK documents The founding statement of a close corporation which encompasses the rules covering the entity CK 1 Original close corporation documents CK2 Amended close corporation documents Cleared A term used to describe funds deposited into an account, which are available for use after the funds have completed the clearing cycle. Cleared balance This is the balance on your account available for use. Clearing cycle The process between banks where a paying bank is informed of an impending transaction on an account and has a certain amount of time to stop or return the transaction before it is debited to the account. Clearing house Operates on behalf of the banking and finance industry and facilitates the settlement of transactions. All material copyright Nedbank 2004 106 Close corporation A close corporation can have between 1 and 10 members. The Close Corporations Act governs it and it is commonly used for smaller businesses e.g. Joe Bloggs Repairs CC. CM29 Document containing the details of directors of a private company Company ta x Taxation payable by close corporations and private companies. The current tax rate applicable is 30%. Conditional sale An agreement whereby ownership transfers to the buyer once all contractual obligations have been met. Confidentiality agreement An agreement drawn up by yourself and signed by parties who have access to information on your business Copyright The law of copyright protects literary, musical and artistic works, computer programmes, broadcasts, sound recordings and films. Consignment Shipment of goods Consignor The person/company who sends goods by ship, land or air. All material copyright Nedbank 2004 107 Constitution Principle laying out foundations on which an organisation, club or society are organised and controlled. Contents This includes all assets, fixtures and fittings for the sum insured. The value is based on a replacement costs basis. Contingent When one outcome is based on another having taken place before Contingent liability Liabilities payable by a business on occurrence of a specific event e.g. a performance guarantee issued by a bank, payable on occurrence of a certain event Controlling director An individual who, with the aid of associates, is able to control at least 20% of the ordinary share capital of a company. Cost of sales The costs incurred by a business in deriving its turnover Credit card Allows you to make purchases on terms for goods and services up to an agreed credit limit Credit limit A limit on a facility granted by a bank within which you can operate freely All material copyright Nedbank 2004 108 Credit rating An assessment of the lending risk associated with a person/business Currency The monetary unit used in different counties Current assets Assets that can be converted into cash or used within one year Current liabilities The debts or obligations of a business repayable within one year D Deferred compensation This is a benefit offered by employers to selected employees. It is a sum of money that will be settled in terms of an agreement between the employer and employee at a certain date or on occurrence of a specific event. This is facilitated through an assurance policy. Depreciation The annual writeoff allowance of an asset over its useful life span Dividend A distribution made from the profits of a close corporation or company to the relevant members/shareholders All material copyright Nedbank 2004 109 Draft A written order issued and signed by one party and addressed to another, requiring the addressee to pay on demand, or at a fixed or determinable date, the amount of the bill to, or to the order of, a specific principal or bearer Donations tax A ta x payable by any individual living in South Africa on the gratuitous disposal of property E Electronic funds transfer (EFT) An electronic bank payment / transfer Equity The owners’ financial interest in a business E-mail Means of sending communications electronically Encryption High-level security software used for electronic data where the data is scrambled to ensure that it cannot be read by any unauthorised party Endorsement Signing of a document to transfer title to another party EPOS Electronic point of sale e.g a till at Pick’n Pay Equity An ownership/shareholding in a business All material copyright Nedbank 2004 110 Equity (Capital) The capital provided to a business by the owners European Monetary Union (EMU) The framework for closer financial links between members of the European Union (Austria, Belgium, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain) Eurozone A name given to the countries in Europe who have adopted the euro as their national currency Excess The portion of an insurance claim for which you are responsible Exchange rate The rate at which one currency can be exchanged for another at a given time Expenses A cost incurred by a business during an accounting period F All material copyright Nedbank 2004 111 Factoring A loan against the funds tied up in your debtors book, normally granted by a bank or debtor finance company Firewall A security system installed on a network to control the inflow and outflow of electronic traffic Fixed assets Assets that have a life cycle longer than the accounting period of the business. These include property, plant and machinery, fixtures and fittings, trademarks and patents. Fixed deposit A bank cash deposit account that pays a fixed rate of interest over a fi xed period of time Fixed interest rate This is an interest rate agreed upon and set during a specified period despite possible fluctuations. Fixed-rate loan A loan granted repayable at a fixed interest rate over a specific period of time Floating interest rate A rate on a deposit or loan that fluctuates over time Floor limit A set limit above which a business must request authorisation from the merchant/bank for credit card transaction All material copyright Nedbank 2004 112 Foreign exchange The exchange of one currency for another at the applicable exchange rate Forward integration This is a diversification strategy e.g buying a business that would make use of your services Franchisee A person who owns a franchise Franchising A franchise is a business that is granted a licence by a franchisor to another party (the franchisee), which entitles the franchisee to trade under the established tradename. Franchisor Business which grants franchise licenses to franchisees Founders Individuals who start a business G Goodwill An intangible asset such as strong brandname, reputation or intellectual property of a business Gross profit The difference between the sales of a business and the cost of goods sold Guarantee An agreement in writing between a bank as guarantor and a beneficiary where the bank All material copyright Nedbank 2004 113 undertakes to pay a stipulated amount to the beneficiary should the client fail to perform H Hard currency A freely tradeable currency such as sterling or US dollars HTML The language in which all web pages are written. (Hypertext Mark-up Language) Hurt money The money provided to a business by the owner I Intellectual property ?? Income statement This is a profit or loss statement reflecting your trading record for a given period. The income statement reflects your sales and costs and determines a net figure at the end of the period indicating a profit or loss. Income tax The tax charged on the income earned of a South African resident All material copyright Nedbank 2004 114 Instalment sale An asset-based finance contract where the client takes ownership of the asset once the debt is repaid in full Insurance Cover against an event that is not predictable Internal controls A system of checks and balances that ensures all actions occurring in your business are in accordance with your business objectives ITC Information Trust Company Intangible assets Assets of a business that do not physically exist e.g. goodwill Interest charged Interest charged by a bank for the granting of a debt facility J K Keyman assurance Assurance on the life of an employee to compensate the business in the event of their premature business All material copyright Nedbank 2004 death. It guarantees will be compensated that the for any 115 disruptions to the business, it will protect any existing credit facilities you have in place and will provide funds for the recruitment and training of a replacement. L Lease Asset-based finance granted by a bank where the business owner has the option to return the asset, sell the asset, re-lease the asset or take ownership of the asset once the debt has been repaid. Leverage Leverage results from the use of fixed operating and financial costs to maximise the returns to the owners of the business. Changes in leverage result in a change in the level of return to the owners and associated risk. Generally, increases in leverage result in increased return and risk, whereas decreases in leverage result in decreased return and risk for the owners. Liabilities Obligations of the business to outsiders or claims against its assets by outsiders Licensing A right given by an owner of intellectual property to another party b y means of an agreement for use of the intellectual property All material copyright Nedbank 2004 116 Liquidity The liquidity of a business is measured by its ability to meet its short-term obligations as they fall due. Loan account cover Debit loan accounts (loans made by the company to shareholders, directors or employees) and credit loan accounts (loans made by the shareholders to the company) in a company can be covered by assurance. Long-term liabilities Liabilities of a business that are payable longer than one year e.g. mortgage finance M Management buy-outs MBOs enable current operating management to purchase the business they currently manage from the existing owners. Monetary Policy Committee The committee appointed by the South African government to set interest rate policy, chaired by the Go vernor of the Reserve Bank. Monetary policy statements Statements issued quarterly by the Go vernor of the Reserve Bank which govern interest rate policies (MPC statements). All material copyright Nedbank 2004 117 Memorandum and articles Rules, in terms of the Companies Act, within of association which a company operates Mission statement Defines what the business is involved in or wants to be involved in. It is the organisation’s reason for its existence. N Net profit The profit remaining in a business once all expenses have been paid Non-executive director A director of a company who is not involved in the day-to-day operations of the business. O Offering The product or service produced by you for your customers Outsourcing When a business chooses to contract out a specific operation to an outside party in return for a fee rather completing the operation themselves All material copyright Nedbank 2004 118 Organisational values Values represent what the organisation and its people stand for. Values keep the organisation on course for what is ‘right’ and what is ‘wrong’. Output tax The tax payable by a vendor to SARS for VAT charges to clients on sales Overdraft A lending facility granted by a bank on a transactional account P 4 P’s of marketing Product, place, price and promotion Pari passu A legal undertaking that a bank will be placed on an equal footing with other secured creditors for a facility granted to a client Partnership The relationship between two or more people to carry on business. Partner An owner of a partnership Partnership agreement The agreement drawn up when forming a partnership Patent Protection of an invention from anyone copying it All material copyright Nedbank 2004 119 Pay-as-you-earn (PAYE) PAYE is a system used for the payment of tax for employees. Any employee who earns over R60 000 per annum must pay PAYE according to the tariff tables set out by SARS each year. Performance guarantee A bank guarantee issued on behalf of a client to a third party allowing the beneficiary thereof to claim payment from the bank in the event of the client failing to fulfil their contractual obligations. Power of attorney An authority given to one party to act on behalf of another Prime overdraft rate The interest rate which banks and finance companies use as a basis for their calculation of interest charges. The base rate fluctuates periodically in line with general interest rates as set by the Monetary Policy Committee. Private company A private company can have between one and 50 shareholders with a minimum of one director, governed by the Companies Act, e.g. Joe Bloggs Repairs (Pty) Ltd. Public liability Covers your legal liability for accidental loss of or damage to a third party’s property or for death, injury or disease to third parties, at or away from the insured premises, should negligence be proven All material copyright Nedbank 2004 120 Q R Regional Service Council levies The levies payable to the Regional Service Council are the service levy and the establishment levy. Registered design Protects specialist designs from being copied. Registered name The name that you trade under (not necessarily the same name that your close corporation/company is registered as) Rental agreement Asset-based finance in terms of a rental agreement granted by a bank where the business owner has the option to return the asset, sell the asset, re-lease the asset or take ownership of the asset once the debt has been repaid Restraint of trade agreement This agreement prevents businesses opening within a determined proximity of yours. Royalties Fees paid to the franchisor, normally based on a percentage of your turnover All material copyright Nedbank 2004 121 S SARS South African Revenue Service Secondary ta x on companies (STC) The tax pa yable by a close corporation or private company on dividends declared to the members/shareholders. The current rate is 12.5%. Security Collateral which can be used to secure a lending facility Seed capital The funds used to finance a new venture Shareholder An individual/entity who owns shares in a company Shareholders’ agreement An agreement/contract within a structure amongst the corporate shareholders. It encompasses the following aspects: - Scope of the business - Administrative aspects - Job descriptions and performance measurements - All material copyright Nedbank 2004 Intellectual property 122 Skills Development Levy (SDL) Exit mechanisms Levy pa yable in terms of the Skills Development Act, Act 9 of 1999, for the purpose of funding education and training Sole proprietorship A business owned by one person Standard income tax on employees (SITE) Employee’s tax payable on remuneration below R60 000 per annum Suretyship A legal document guaranteeing payment by an individual/entity for another’s debt in the event of no payment. This can limited to a specific amount or unlimited. Sustainable competitive advantage The aspect of your business that sets you apart from your competitors; the reason why customers will buy your product instead of other products SWOT analysis Identifies the strengths and weaknesses within your business and the opportunities and threats that your business faces from outside. T All material copyright Nedbank 2004 123 Term loan A loan granted by a bank normally for a duration of between 3 and 10 years with security Trademark A trademark means words or a design unique to the goods or services of a business that distinguishes it from other suppliers or manufacturers. Trademarks can be registered over these words or the design for 10 years. Trust deed A document containing the conditions of a trust Turnover Sales made during the year U Unemployment Insurance Fund (UIF) This fund provides benefits for unemployed workers. Every employed person must be registered with the fund and make monthly contributions. V All material copyright Nedbank 2004 124 Value-added tax (VAT) An indirect tax charge on most transactions. The current rate is 14%. Values Values represent what an organisation and its people stand for. Variable rate An fluctuating interest rate VAT exempt Goods on which no tax is claimed or paid VAT zero rated Goods on which no VAT can be added but VAT is claimable on the expenses of Production Vision statement The vision statement of an organisation provides the overall direction in which the organisation is heading; it keeps all parties in the organisation focused on their defined goals. W Working capital The short-term cash resources required by a business, primarily for cash, debtors, work in progress and inventory Workmen’s compensation An insurance for employers against accidents or illness that could result in death or disability for employees while working for the business All material copyright Nedbank 2004 125 X Y Z SECTION F USEFUL WEBSITE ADDRESSES 4.1 www.sars.gov.za - South African Revenue Services 4.2 www.dti.gov.za 4.3 www.reservebank.co.za 4.4 www.treasury.gov.za - National Treasury 4.5 www.statssa.gov.za - Statistics South Africa 4.6 www.cipro.go.za - The Department of Trade and Industry - South African Reserve Bank - Companies and Intellectual Property Registration Office All material copyright Nedbank 2004 126
© Copyright 2024