Accounting - Outsourced Finance

In light of the February 2019 State of the Nation Address, which mentioned the continued increase in spending for small business incubators; the experts at Outsourced Finance got thinking: what is the true state of financing for small, medium and micro-sized enterprises (SMMEs) in South Africa?

SMMEs struggle with access to finance because the organisations that are meant to support them, make them jump through numerous hoops and still often end up rejecting the application.

Take for example, applying for a business funding loan through the South African banking sector. Endless lists of forms are filled in and the founders must provide some form of guarantee that the business will be profitable – which we know is nearly impossible to do, as the business market is as unpredictable as the weather. The bank’s only concern is that the founder will be able to pay back the loan. Even if you were able to convince the bank that you are able to see the future enough for them to approve your application, the interest rate to pay back the loan adds a further burden to carry and could be the thing that potentially ruins your business. According to the IFC Unseen Sector Report, 75% of SMME credit application are rejected by Banks, while only 2% of new SMME are able to access bank loans.

The only alternatives then available are private equity funding and government. Meeting the criteria for private equity funding is just as tedious, and even less favourable because of their demand for equity in your business. This often results in the SMMEs selling their business for nothing to get funding.

Then there is government, the teeth-grinding process that could have you waiting from 6 months to 2 years for funding. During that time, businesses either collapse or another person has gained significant market share which increases the barrier to entry.

A revolution is needed in the area of financing for SMMEs. Financers need to be more understanding with start-ups. Yes, there is a high risk, but there is also huge potential for reward. Entrepreneurs can’t be expected to get it perfect from the start, and they need to not be penalised so harshly if they don’t. They need to have room to fall and then get back up to rethink their strategy or restructure their business if they need to.

Outsourced Finance is calling out to all the big banks: FNB, Standard Bank, Nedbank, Capitec and ABSA; to have a discussion about being radical about funding SMMEs, seeing each one as a potential partner and not just another number through a machine.

To the South African government; it’s time to talk about the Department of Small Business Development (DSBD). How can it be transformed to become truly impactful and not just a term that is thrown around by political parties during election time? There needs to be faster access to finance, and the credit checks for SMME founders needs to be adjusted, considering they may have had a bad credit record because they were self-funding the business and not necessarily as a result of reckless credit usage – often this fact is overlooked.

The SMME industry is the engine for job creation, and this engine is in need of a long overdue service. There is a desperate need for more support for small businesses, to free entrepreneurs from the ruthless regulations that have them wondering if their dreams are even worth the risk and effort.

We want to hear from entrepreneurs and small business owners in South Africa. The International Finance Corporation is conducting an online survey on the challenges and opportunities facing entrepreneurs in South Africa. Click here https://bit.ly/2ERiRJb to help increase access to finance and markets for SMMEs by sharing your experiences.

You can also read The Unseen Sector: A Report on the MSME Opportunity in South Africa to get a better understanding of how these SMMEs can aid economic growth and reduce unemployment rates.

Accounting jargon is often thrown around by banks and accountants about your business financial wellbeing. This can cause many business owners to go into a state of panic and confusion.

Here is a 101 on what the jargon truly mean for your business:

Revenue:

How much you sell your products/services for. For example, if you own an online furniture store and sell a dining room set for R20 000, that is the revenue.

The following are key questions that you should ask yourself as a business owner with regards to how much you should sell for:

1. Pricing: Is your selling price enough to make a profit and attract enough clients?

2. Competitors: How much are your competitors selling their product/service for?

How can you gain market share from your competitors ?

Is there a price difference because of the quality of their product/service – is there a competitive advantage?

Cost of Sales:

How much money did you spend to be able to make the product or provide the service you are selling? For example, your furniture store purchased wood for the dining room set for R8 000 and you spent R2 000 on an expert to put it together; therefore, R10 000 is your cost of sale.

Questions to ask yourself:

1. Cost: Are you paying the same amount (industry norm) as your competitors to produce your product/service?

Could you negotiate a better buying price from your suppliers?

2. Salary: Are you paying the right salary/wages for your employees compared to what other employees in that field are earning?

Gross Profit:

If you take the selling price (revenue) of the product/service and remove the cost of producing the product/service (cost of sale), are you making enough money? For example, if you sell the dining room set for R20 000, and you spent R10 000 to produce it, you would make a gross profit of R10 000.

Questions to ask yourself:

1. Are you making enough profit compared to others (industry norm) who also sell this type of product/service?

2. Are you making enough profit to cover your other expenses?

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Expenses:

These are the general costs of running a business such as rent, water, electricity and staff salaries. Question if you are paying the industry norm with these expenses, as often these get over-looked and can affect the growth of your business.

Depreciation:

This is the reduction in the value of your assets (equipment/machinery) on a monthly/yearly basis due to wear and tear. For example, if you buy a computer for your business at R6 000, and after 3 years you need to buy a new computer, you will use up R167 worth of the computer each month (R6000 / 3 years/ 12 months = R167). The computer will then be worth R167 less every month that it is used during those 3 years. Questions to ask yourself:

1. When do you replace your equipment and how much will it cost to buy another one?

2. How much can you sell the old equipment for?

Net Profit/Loss:

How much money your business makes or loses per month/year after the cost of sale, expenses and depreciation. For example, your furniture business sells a dining room set for R20 000 which cost R10 000 to make, pays R5000 in general expenses and your assets depreciated by R167, the Net Profit for your business is R4833 (NP %  is  4833/ 20000 = 24% ).

Questions to ask yourself:

1. Profit: Is the amount of money made worth the investment (money & time) you have put into the business? What is the net profit percentage industry norm?

2. Loss: If I did not make money from the business, is it possible to make money next month/year?

Source: StatsSA Quarterly Financial Statistics Survey – December 20181 (QFS) estimates, NP% norm for SMME industry for December 2018

Balance Sheet:

This records the assets (resources you own), liabilities (the amount you owe to other people) and equity (investment you have put into the company).

Questions to ask yourself:

1. Liquidity: how quickly can you turn your resources into cash in the bank? How quickly can you sell your inventory or get your debtors (people who owe you money) to pay?

2. Solvency: When do you need to pay the people you owe, and do you have enough money to pay them?

3. Return on investment: after all you have invested into the business, how much are you making?

Cashflow Statement:

This is a list of all the money that entered or left your bank account. You can be profitable but not have money in the bank. The primary cause of this is because you have sold the product, but the customer has not paid you.  Alternatively, it could be because you loaned money from the bank or investors and you had to take the profit from your business to pay the loan. Cashflow is one of the main reasons small businesses fail. Keep a close eye on this information, ask yourself the following questions:

1. Is the cash in your bank enough to cover your costs?

2. How can you save enough money to cover your costs for 3 months, even if my customers do not pay?

3. How much of your money is going to be used to pay off loans?

Do not let the accounting jargons get you down; no one knows your business better than you. It is vital that you can translate your understanding into the global language for business (accounting) so that others are able to aid your journey of growth.

When you start your business on a budget and funds are limited, you are likely to cut costs and strengthen the funds available as much as possible. You might consider taking charge of your business’ accounting affairs, but if you do not have the right skill set and incorrectly capture your financial data, it could be detrimental to your business in the long run. Accountants are valuable at each stage of your business to ensure the growth and sustainability of your business.

Start your Business

An accountant can assist you with validating the proof of concept of your business. Often business owners focus on the business plan, however, there is no short-term measurable proof of concept sprint to ensure the business survives the first year. Accountants bring their expertise and experience to ensure your business is viable from the start, and if it is not feasible, they will minimise your financial loss as much as possible.

In South Africa, it is essential that you chose the right business structure (Sole Proprietor, Partnership, Private Company, NPO of NPC). Having the right accountant means that they can advise on the best business structure to minimise your financial liability. They will be able to assist in regulatory and compliance requirements for your business, e.g. Tax registration, Department of Labor Registration, COIDA and any other industry-specific compliance.

When looking into hiring the right accounting firm, find one that is familiar to your industry. For example, if you own a small business, you want to find an accounting firm that advocates for small businesses. Accuracy and precision are of the utmost importance in the accounting of a small business because it is so much more difficult to find funding in the first place. Compare this to a large corporation where an error, even in a large amount of money, is something that they are likely to be recovered from quickly. The same cannot be said for small businesses, as even a small mistake could have disastrous effects.

Run your Business

Once your business is off the ground, your financial data is an integral part of ensuring the sustainability of your business. Your accountant can assist you with the maintenance of your accounting records, cash flow forecasting, market analysis, income projections and many other financial aspects of any business. This information will be vital to your ability to make a strategic decision.

You will know you have the right accounting firm when they are nagging you instead of you nagging them. This lets you know that they are focused on your business and that you are a priority to them.

The last thing you want is an accounting firm that is overwhelmed by other clients and either makes you feel second-rate or takes forever to attend to your books – causing you fines because you have missed SARS deadlines.

Grow your Business

When you are ready to grow (expand) your business, your accountant can be an indispensable resource that provides advice and manage the process. An accountant will provide insight on the cash flow effect of the growth strategy, information on the best funding mechanism to use to fund the expansion are critical in the valuation process of your business if you are looking to sell equity. Having an accountant also makes your business “Investor Ready”. They provide a level of assurance and credibility for your business to gear it up for growth.

The right accounting firm will be able to look at your business holistically and be able to forecast opportunities, expenses and challenges ahead and advise you going forward. Find an accounting firm that will put your business’ best interest first before anything else.

An efficient and honest accounting firm helps you with valuable professional advice for the development of your business. For professional accounting help that will always put your business first, contact Outsourced Finance.

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Often business owners, especially new business owners, underestimate the importance of hiring the right accountant for their business.

The focus is usually tax compliance or funding requirements but many lack the understanding of the value of their financial data in making strategic financial decisions.

There are four critical criteria to consider in choosing an accountant:

1) Qualification and Regulatory Body Affiliations

South Africa has six major regulatory bodies for an accountant:

• South African Institute of Chartered Accountants (SAICA), represents CFOs,FDs, CA, Auditors
• Association of Chartered Certified Accountants (ACC), represents CFOs, FDs, CA, Auditors
• South African Institute of Professional Accountants (SAIPA), represents General accountants, SME practitioner
• Chartered Institute of Management Accountants (CIMA), represents Management accountants
• Institute of Accounting and Commerce (IAC), represents General accountants, SME practitioner
• Southern African Institute for Business Accountants (SAIBA), represents Bookkeeper, accounting clerks, General accountants, SME practitioner

Choosing an accountant from one of the regulatory bodies will ensure that you have hired an accountant with the right competency and professional code of conduct. Beware of accountants that are not part of a regulatory body; it might be difficult for you to establish their skill and this also limits your recourse if they do not perform their fiduciary duties.

2) Tax Practitioner Status

Ensure that your accountant is a registered Tax practitioner with SARS. The Tax Administration Act (TAA)  28 of 2011 requires that a person giving advice or submitting tax returns for a fee needs to be registered with recognised controlling bodies.

The following is a list of currently recognised controlling bodies:

• Chartered Institute of Management Accountants (CIMA)
• Chartered Secretaries Southern Africa (CSSA)
• Financial Planning Institute (FPI)
• Institute of Accounting and Commerce (IAC)
• SA Institute of Chartered Accountants (SAICA)
• SA Institute of Professional Accountants (SAIPA)
• SA Institute of Tax Practitioners (SAIT)
• The Association of Chartered Certified Accountants (ACCA)
• Association of Accounting Technicians Southern Africa (AAT(SA))

Beware of SARS employees offering services for a fee as a third party (TP). This is illegal.

3) Knowledge of your Industry

Interview potential accountants to gauge their understanding of your industry; this will be key in their ability to provide value adds and aid in the growth of your business.

4) Part Time/Full time

Understand if your accountant is providing services to clients on a full-time basis or if it is a side hustle. In our experience, a side hustle accountant struggles to provide the right accounting support to their clients. You would not take your child to a side hustle doctor, do not do this to your business.

At Outsourced Finance, we are affiliated with the following regulatory bodies, SAICA and SAIPA. We ensure continuous professional development for our staff to maintain our high quality of service.

For qualified and registered accountants that will take your business seriously, contact Outsourced Finance today.