Finances is an integral part of any business. Let us be honest there is no sense in running a business that is not profitable unless it is for a charity cause. The sad reality is that plenty of business owners don’t spend a lot of time on managing and analysing their finances. Finances is often perceived to be boring, complicated or only a support function within a business. The truth is the better you manage your finances, the more successful your business will become. The better you know your numbers, the more powerful decisions you can make.

You can outsource your finance function or appoint financial people in your business, but as a business owner you should still know and understand your numbers. There are plenty of important numbers in your business you should know. The numbers will also differ from business to business – what might be critical for one business, might not be important for another type of business. Let us discuss the six numbers that are important for the majority of businesses:

1. Cash

Cash flow is properly the most important number in any business. Multiple large corporations have closed their doors due to cash flow problems. A business can be profitable with good sales, but experiencing cash flow problems. Cash refers to the physical cash that you have available in your bank or investment account. Cash is needed to pay the expenses, pay creditors and to grow your business.

Cash management goes hand in hand with how well you are managing your debtors and creditors. You could have had great sales, but many of the customers / clients have not paid yet. Or you need to pay your suppliers and expenses before you will receive the cash. Both these scenarios can create serious cash flow problems. 

2. Sales (Revenue / Turnover)

Your sales determine your revenue or turnover, in other words the revenue / turnover before cost of sales or expenses have been deducted. In theory, the more you sell of your product or service, the more profit you will make (although this is not always true). Therefore it is important for any business, to know and manage their sales numbers. It certainly helps to pro-actively identify a decrease in sales and investigate the reasons for it.

It is also important to identify trends. For example, an ice-cream company might see a decrease in sales during the winter months but a spike in sales during the summer months. By knowing these trends you will know whether a decrease in sales is due to the nature of the business or whether there is a problem. You constantly want to drive your sales numbers and exceed the set sales targets.   

3. Profit

Profit is determined by deducting cost of sales, expenses, and tax from your revenue / turnover. You want to end up in a profit position and not a loss position where your cost of sales, expenses and tax exceed your revenue / turnover. It is possible to reach sales targets but make a loss. That is why costing and pricing of your product / service are critical aspects of your business and so is expense management within your business.

Profit can be increased by either increasing your revenue or decreasing your expenses. You will pay tax on profit, therefore you need to also take tax into account when you do your budgets and forecasts.

4. Direct and indirect costs (expenses)

Profits are directly impacted by expenses. It is important to know both your direct costs and indirect costs since both costs play a critical role in the pricing of your product or service. A particular product / service can perceived to be profitable, but once you also take the indirect costs into account, the product might be selling at a loss.

For example: if you sell hotdogs, your direct costs will be the cost of your bread rolls, the sausages, the sauces, the butter and the packaging. Direct costs are the costs attributed to delivering your product or service. The indirect costs might include things like the electricity to heat up the sausages, the salaries of the staff members preparing and selling the hotdogs and marketing costs. Ensure that you take both direct and indirect costs into account when you set a price for your product / service or determine your profit margin. 

5. Budgeted numbers

A budget is crucial for any business regardless the size of your business. A budget is an effective tool to help you plan for the year ahead. You also want to do forecasts for the medium and longer term i.e. 2-5 years and 5-10 years. Forecasts help you to identify those big future expenses that you ideally want to start planning for early on i.e. moving into a bigger office, replacing your computers or buying a delivery vehicle.

It is however inadequate having a budget if you don’t compare your actual revenue and expenses to your budgeted numbers. By comparing your actual numbers against your budget and analysing the reasons for variances, provides you with valuable information to make effective financial decisions.

6. Debtors (Accounts receivable)

Ideally you want to run your business on a cash basis. It is however not always possible and the nature of many businesses force you to allow for debtors (also referred to as accounts receivable). Long outstanding debtors can create cash flow problems and irrecoverable debtors can cause for your business to close down.

Know your debtors and constantly manage your debtors’ balances. Adopt a payment policy and communicate it to your customers / clients. Do credit checks on your customers / clients and stop providing products / services to them if they don’t pay you within your set timelines.

Start off by knowing and managing these six numbers. It will certainly help you to create a more profitable and successful business. 

This article was written for publication in the Woman Entrepreneur magazine.

Visit the website to learn more about our financial consulting and training services for businesses.

Click here for more information about our course for start-up businesses. 

Written by: Ronel Jooste

CA(SA), Financial Consultant, Speaker and Author of the award-winning book Financially Fit and Wealthy

Contact: ronel@financiallyfitlife.co.za

This webinar was recorded to celebrate Money Smart Week South Africa. Start a Business and Become Financially Independent. In this webinar I share how starting a business can help you to create multiple sources of income, create wealth and ultimately create financial independence. I also discuss 10 steps how to start a successful business. If you are an aspiring entrepreneur or a business owner still in start-up phase, this webinar will certainly help you gain more insight in starting a small business.

Investments play a vital role in creating financial stability and adding muscle to your wealth portfolio. The more you can invest today, the stronger financial future you can create. To make smart investment decisions, you need to understand a few investment concepts and principles.

• Educate yourself about investments and ensure you understand the basic concepts:
  • Compound interest – earning interest on interest.
  • Risk and Return – risk is defined as the uncertainty that an investor is willing to take to realise a gain from an investment knowing that a loss can be realised as well. Low risk is generally associated with lower returns and high risk with higher returns.
  • Risk profile of an investor – the level of risk an investor feels comfortable with.
  • Liquidity – how easily you can access your money or convert it into cash.
  • Investment period – investment products either have a shorter or longer term period attached to it.
  • Diversification – by investing your money in more than one investment type (for example cash, property, shares, endowment policies, etc.) or more than one fund you spread / minimise the risk.
• Do proper research to understand the different investment options, products and platforms. Understand the fee structure, requirements, and penalties for early withdrawal as well as the fine print in the contract.
• Don’t invest for the sake of investing or because you heard from somebody else who had a good experience about the investment product. What works well for somebody else might not work for you. Ensure that you choose an investment that caters for your needs
• Start small. It is a myth that you need lots of money to start investing. Look for investments with no or smaller minimum investment requirements and start building up your funds till you can invest in more sophisticated products with higher minimum investment requirements offering higher returns;
• Investments take time to mature and render healthy returns. You need time for your investments to reach maximum growth and returns. A longer investment term yields higher returns and maximises compound interest returns. Investments are less impacted by market volatility over the long-term;
• Whenever you have excess cash available, transfer it out of your day-to-day bank account to an investment account. You receive very little interest on money in your day-to-day bank account and you will be tempted to use it;
• Be willing to take some level of risk. If you don’t have excess money and are not willing to accept the risk of potentially losing it by investing in high risk investments, then rather stick to investment options with lower to medium levels of risk. If you are knowledgeable about the investment options and financial markets, you will feel more comfortable to take calculated risks. By having proper financial knowledge, you can manage the level of risk downwards;
• Ensure you have a suitable, diversified investment portfolio;
• Be disciplined. Be diligent and invest on a regular basis. Don’t be tempted to spend your investment money. Be patient and don’t panic when markets are going down, as they will recover;
• Monitor your investments on a regular basis. Look for alternative investments if your investment is no longer performing. Know what is going on in the financial world, news, politics and economy and how this could potentially impact your investment decisions; and
• Understand what the tax implications of your investments are and budget to pay those taxes. Investors often forget to take taxes into account when making investment decisions. The tax implications can make certain investments less attractive.

 Start building your investment portfolio today.

This article contains extracts from the book ‘Financially Fit and Wealthy’. To learn more about the book – click here

To download your FREE Guide to Smart Property Investments – click here

Debt is probably the biggest thief stealing financial freedom from people. Once in the trap of having too much debt, it becomes increasingly difficult to get out of this situation. People are trying to survive to the next payday in order to use their salary to repay debt for expenses they already incurred in the past. Debt prevents people from saving and creating an investment portfolio. High interest rates on debt result in people acquiring more debt to repay debt. Paying interest on debt is essentially making yourself poorer while you make somebody else wealthier. Debt is easily available in South Africa and when the economy is struggling, more people rely on debt to survive and to keep up with their standard of living.

Repaying any debt as soon as possible will certainly contribute largely to creating financial stability and a better financial future. The golden rule when it comes to repaying debt quicker is to pay more than the minimum installment required. Any money that you pay on top of the minimum installment will be allocated to reduce your outstanding capital amount. That is exactly what you want to achieve – reducing the capital balance outstanding. By reducing the capital balance outstanding you will also reduce the interest you will be paying.

It certainly is not always that easy to find extra money within a budget, to allocate towards repaying debt. What other options can you consider to repay your debt quicker?        

• When receiving any once-off amounts i.e. bonus, 13^th cheque or refund from SARS allocate the full amount or a large portion to repay debt. You might think this is hard-earned money that you deserve to treat yourself to something nice but the benefits of becoming debt free are priceless.
• Downgrade from your annual holiday trip to a more cost-effective holiday i.e. doing day trips and allocate the money you save to repaying your debt. A cheaper holiday option can still be a lot of fun and it also provide you with the opportunity to teach your children valuable lessons about life, gratitude and saving money.
• Think of something that you do often and spend quite a lot of money on for example buying coffee or eating out. Make a decision to rather allocate the money you would have spent on every third cup of coffee or restaurant to repaying debt. You might think this is such a small amount, but it quickly adds up and before you know it your overdraft or clothing account balance will start to reduce and you have more money left at the end of the month to start investing.
• Make a decision to critically analyze your expenses on a regular basis. Ask yourself: ‘do I need this expense to survive through the month or is it a nice-to-have expense?’ If it is a nice-to-have expense, you should be able to either reduce the expense or cut it out completely. Transfer the money that you save to your bond on a monthly basis.
• Transfer any excess money at the end of the month to your bond. By leaving the money in your daily living bank account you will be tempted to spend it on something that you don’t need. The interest that you might earn on your bank account is also minimal compared to the interest you will save over the long run by repaying your bond quicker.

All of the options listed above encompass money that you are already spending or will be spending once received. It is merely about making a decision to be smart with your money by not spending it but rather allocating the money towards repaying debt. To make this decision easier, ask yourself the question: ‘How will it make me feel to be debt free?’

Set financially fit goals

We all are unique, are in different situations and have different aspirations / goals in life. It doesn’t matter what your goal is, but you need to have a goal. Without having a goal, you

will float through life with no purpose. Goals give purpose. Goals give direction. Goals motivate you to thrive instead of just surviving.

First of all, set your financial goals in a way that is SMART:

• Specific – define your goal clearly.
• Measurable – set smaller milestones that can be measured.
• Achievable – dream big but be realistic. Your goal must be achievable to keep you motivated.
• Relevant – it should be relevant to you. Your personal financial goal should be something that inspires you.
• Timelines – establish when you want to achieve what.

If you write your goals down, it creates a sense of responsibility and you will be more likely to achieve it.

Analyse your current state

To achieve your financial goals, it is equally important to analyse and understand your current financial status.

Ask yourself these questions:

• What is my net worth (assets less liabilities)?
• What is my financial freedom number?
• How much is my monthly income?
• How much are my monthly expenses?
• How much debt do I have, and what are the interest rates and repayment periods?
• How much do I have available as an emergency fund and how much should I have?
• How much investments do I have, what are the interest rates and how liquid are the investments?
• How much do I currently have in my retirement fund and how much do I need at retirement age to retire comfortably?
• Do I have adequate life, disability and dread disease cover?
• What does my medical aid cover?

Write all the numbers down to obtain an overall picture of your current financial status. Spend time getting to know these numbers and identify some gaps to work on.

Compile your plan                

To progress from your current financial status to where you want to be, you need a detailed plan. When compiling your plan:

• Be realistic;
• Do it in detail;
• Set timeframes;
• Include calculations; and
• Break it up into smaller milestones.

Once you have a plan written down, you are set to achieve your financial goal.

Take action

As with anything else in life, you need to take action to make it happen. Without taking action, your goal remains a dream. Without changing your current actions, you won’t get a different result.

You need to make an effort to put your financial plan into action. It starts with a choice and only you can make that choice.

Start small but start. Once you have started, it quickly becomes a habit and becomes easier. Take action to make your financial goal your reality or else it will remain a dream only. You will not regret it. Visualise your financial future, knowing that nothing is impossible if you set your mind to it and take action steps to achieve it.

This article contains extracts from the book ‘Financially Fit and Wealthy’. To learn more about the book – click here

To download your FREE Financial Goalsetting workbook – click here

December is time for fun, relaxation and spending time with loved ones. It is school holidays and the children need to be entertained for an extended period. Many people go away to a holiday destination while other people stay at home and do day trips. December is associated with entertainment, activities and gifts.  

You are going to spend money during the festive season, but try to keep within your budget. Especially this year to ensure you can recover from the financial strain the 2020 lockdown period has caused. Everything is more expensive during December and January is a long and tough month with lots of expenses as well. Enjoy the holidays but spend wisely. Here are a few saving tips for the holiday season:

• You don’t always need to buy expensive gifts. Most adults and children value time and attention more than expensive gifts. Give your loved ones the valuable gift of your time and attention this December. Rather create memories, because memories last a lifetime.
• Ask your family and friends to compile a wish list. Rather spend money on gifts that will be appreciated than wasting money on gifts the receiver won’t use or derive value from.
• Shopping during the holiday season is unavoidable but plan your shopping sprees in advance. Don’t go to the shops unnecessarily, compile a shopping list and stick to it, look out for discounted prices and make use of loyalty programmes at shops.
• Don’t spend a fortune on decorations that will rapidly be forgotten. Use fruit bouquets that can double-up as dessert and flowers from your garden to create something cost effective, unique and special.
• Entertaining will feature on your to-do list this summer, but don’t carry all the costs. Entertaining at home is mostly a lot cheaper than going to restaurants or entertainment venues. Ask friends and family to all contribute their favourite dish towards your feast meal.
• If your budget is getting really tight during the holiday, be creative when planning activities. You can still have lots of fun without splashing out on activities. Make the most of the gorgeous summer weather and enjoy a picnic outside with friends and family. Movie night at home with popcorn and milkshakes is a great idea and so is a cook-off. Or camp in your garden, braai marshmallows and try to count the stars.
• Mountain biking is a fun and cost-effective activity to keep the kids entertained on a low budget. Go for walks with the family and dogs. There are beautiful parks, botanical gardens and nature reserves that you can enjoy without having to spend a fortune.
• Fortunately there are massive sales following the mad rush of inflated prices over the X-mas period. If you plan properly for the year ahead and stick to your budget, you can pick up great savings the week after X-mas. Be money wise though and don’t buy things you don’t need.

This December might be a bit different due to the negative impact lockdown had and still has on many people’s budgets. It certainly was a year filled with financial stress, uncertainty, health concerns and disappointments for many people. You deserve to spoil yourself and your family this December and celebrate that you are still alive and well, but make money wise decisions. Have a blessed holiday season!

Facing the chaos of a world pandemic during 2020, the thought of a December period where we can relax and recharge is certainly something to look forward to. It is time to forget about what happened in 2020 – the good, the bad and the ugly – and get ourselves ready for 2021.

Here is a wellbeing checklist to help you make your holiday season as smooth as possible:

• Unfortunately bad things still happen and death still claims lives during the holiday season. Ensure that your life insurance, funeral cover and will are up to date at all times to avoid leaving chaos behind.
• Crime, house robbery and motor accidents increase significantly during the December holidays. Ensure your household content and motor vehicle insurance plans are up to date.
• Make sure that your house alarm, electric fencing and other security measures are in working condition before you go on holiday. You don’t want to run the risk that the insurance is declining your claim because the pre-set conditions were not met.
• Check that your vehicle is in a good condition and that your vehicle’s licence and your personal driver’s licence are valid.
• If you are traveling aboard over the holiday period, check that you have travel insurance in place and that your needs are covered. Especially this year with all the uncertainty and circumstances that can change unexpectedly and within the blink of an eye.
• Always remember your health is your wealth. Take time out to relax and recover following all that has happened this year.
• December holidays is a time to over-indulge and being out of routine. Enjoy yourself, but take care of your body: make time for some exercising, still eat healthy most of the time, keep portion control in mind, drink plenty of water in the heat and don’t consume too much alcohol.
• Live every second to the fullest! 2020 taught us that tomorrow is not guaranteed and life as we know it can change instantly. Make memories. Spend time with your loved ones. Remain positive. Choose to be happy.

Life can be tough at times but you have the power to choose how you will respond to it. Wishing you a blessed holiday and a prosperous 2021!    

Are you self-employed and feeling stressed about not having sufficient retirement savings? Plenty of business owners are still seen to be actively working years after reaching retirement age. They really love what they do or they don’t have somebody reliable to take over or they don’t want to let go of their ‘baby’ are the common reasons provided to explain this situation. Yes, these can be valid reasons or reasons contributing to the situation but for many business owners the harsh reality is that they cannot afford to go on retirement.

According to National Treasury less than 6% of South Africans can retire comfortably without having to significantly reduce their standard of living. People who are self-employed tend to have less retirement savings than their counterparts working for an employer in a more formalized, structured set-up. This is mainly due to employers’ remuneration packages placing a compulsory obligation on employees to contribute to the employers’ pension or provident fund.

While employed people will benefit from having these benefits incorporated in their remuneration packages, self-employed people are responsible to make provision for retirement themselves. When a business is still in start-up phase or not performing well financially, making provision for retirement savings often disappears from the radar or are put on hold with the intention to catch up at a later stage.    

Here are a few tips and considerations for business owners to be better prepared:

• Take out a retirement annuity as soon as you start a business if you don’t already have an existing retirement annuity and start contributing towards it as soon as possible. With the time value of money principle in mind, it certainly is beneficial to make the minimum required contribution early on and increase contributions as the business is growing than to not make any contributions at all.
• Take advantage of the tax deductions where you can deduct your contributions made towards your retirement annuity up to 27.5% of the highest of either your taxable income or total remuneration, with a maximum of R350 000 per tax year. If you are not in a position to make regular monthly contributions, you can top-up your contributions anytime during the year to maximize your tax benefit.
• Don’t be tempted to use your retirement savings from your corporate job to start your business once you leave your job. Transfer your retirement savings to a preservation fund and leave it to grow gradually.
• Many businesses are dealing with the complexity that revenue is not earned on a consistent basis or the business is doing exceptionally well during certain periods and poorly during other periods. In this scenario it is advisable to put away sufficient money during the good times to also make provision for the bad times.
• When your business revenue is quite volatile (i.e. rapidly changing all the time) or not consistent from month to month, the most effective money management habit to adopt is to put away a certain percentage of any income you receive to provide for retirement contributions etc.
• The sooner you can get to a position where you pay yourself a fixed monthly salary from your business the better. The salary you are paying to yourself should ideally make provision for contributions towards a retirement annuity, medical aid, life policy, disability and dread disease policies, income protection and funeral policy. Alternatively, you can set-up these benefits within your business as your business grows and you start employing more people.
• As you get closer to retirement age start planning for life after retirement and set the business up accordingly. Do you plan on selling the business and invest the profit derive from the business to also contribute to your retirement savings? Do you have a succession plan to train somebody else to take over from you? Will you still own or partially own the business and earn income from it after retirement?

There certainly are plenty of things a business owner should pay attention to in addition to running a successful business. Remember it is not all about business, you should also take care of your personal health and financial wellbeing. You don’t want to work hard building a business for many years and then having to struggle financially during your golden years.