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Empowering SMMEs for a Sustainable Future

Basic Financial Management for SMMEs

Presented by

Bonolo Ramokhele CA(SA) UNISA Senior Lecture _ Management Accounting

Co-Chief Executive Officer at LeoFortis Group

Chairperson of Johannesburg Hub _ World Economic Forum Global Shapers

Play Your Part Ambassador _ Brand South Africa

Committee Member _ ABASA Bursary Committee

Our Goal → know and understand the basic concepts of financial management

What is this “Financial Management?

1. Book-keeping

2. Financial planning

3. Managing your cash flows

4. Know (analyse) your financial position

Layout of topics

5. Risk management

6. FACTS about SMMEs in South Africa (even Africa)

Layout of topics (cont)

1. Book-keeping

Maintain thorough records. Why? Importance of accurate record keeping Trace performance – know what's going on NB!! Make better/informed business decisions Ready and accurate information when seeking funding Budgeting and planning (expenditure, variances) Comply with laws and regulations (Co Act, tax, etc.)

Accounting cycle

1. Book-keeping (cont)

Appoint (outsource) qualified accountant

Accounting cycle


Accounting cycle


Record transactions (filling invoices, etc.) Classify transactions Summarise the data (collection of grouped transactions)

→ Management accounts → Trial balance → Statement of Comprehensive Income → Statement of Cash Flows → Statement of Changes in Equity → Statement of Financial Position * Integrated reporting

Accounting cycle


Weekly, bi-weekly, monthly, quarterly, annual reports – depending on your needs

Know your → Expenses → Income → Cash → Tax (NB!), compliance

Invest in a good Accounting System

→ Research on most appropriate system → Advise from your accountant


Business finance vs personal finance – completely separate Good system of Internal Control → a process for assuring achievement of an organization's objectives in operational

effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies

System of Internal Control


Adaptable and particular to your business processes (what are the day-to-day activities in your business?)

Thus need to understand your business process within or across operational units or functional arears

Effected by people – not just a system, manual, form on paper. Should be interactive, practical and useful

Should have an end goal – so should ask why is there a need to do things in particular way given the set-up of your business operations

Components of Internal Control


Control environment

Risk assessment

Control activities

Information and communication

Monitoring activities



Control environment

Foundation of all other components – establish the tone from the top

Provides discipline, process and structure

Commitment to integrity and ethical values

Structures, reporting lines, appropriate authorities

NB! Hold individuals accountable for their responsibilities in pursuit

of the set objectives



Risk assessment

Identifying and analysing risks to achieving your set business objectives Four principles

1. Specify, with sufficient clarity, the objectives of your business. This is so you can identify and assess the related risks

2. So identify those risks, anaylse them and then determine how they should be managed

3. Consider potential for fraud when assessing the risks 4. Constantly look out for, identify and assess changes in your business

and externally



Control activities

Actions established by the policies and procedures – so that the directives

to mitigate risks are carried out

→ Select and develop those control activities/actions (a set process of

how to do things), incl. over technology

→ Deploy those control activities as set out and expected



Information and communication

Communication is necessary to carry out internal control responsibilities

→ This should occur internally and externally and provide your business

with the information needed to carry out day-to-day activities

→ Enable all personnel to understand their internal control

responsibilities and their importance to achieve company objectives



Monitoring activities

Ongoing valuations, separate/planned valuations to see if each of these

components are present and functioning

Findings evaluated and deficiencies are communicated timeously (and

corrective actions taken)

→ Sound financial planning is crucial to the long-term success of your business

2. Financial planning

Short-term financial planning

2. Financial planning (cont)

Understand and manage your “working capital” as it will have the largest impact on your short-term cash flows

Its about keeping an eye on your current assets and liabilities → Raw or finished inventory (if you selling goods) → Debtors/receivables → Creditors → Cash (negative or positive)

Strike a balance between accounts payable vs. cash cycles → accounts payable cycle is the time a company takes to pay for its inventories,

and the cash cycle is the time debtors take to pay you for products sold

Cash shortages – paying cash vs. credit, collecting due accounts etc., extending credit terms

Long-term financial planning


SMME generally less concerned with long-term planning than getting off the ground and surviving

The aim here is to → Identify your business’ financial goals → Understand those goals vs. your current financial status → List the actions to get your business to reach those goals

Major purchases/projects → New equipment, project, upgrade, expansion, etc. → Understand capital requirement → Detail financial analysis – cost vs. benefit → Buy or lease? → Tax incentives → Hidden costs – installations, maintenance, repairs, training etc.

Long-term financial planning


Elements of LT financial plan → Sales forecast

→ Pro forma financial statements

→ Projected capital spending

→ Financial requirements – need to pay out any dividend or contractual

arrangements?

→ Economic assumptions

This financial plan is meant to → Make a link between different investment proposals and financing choices;

→ Help find the best investment and/or financing option

→ Avoid surprises

3. Managing your cash flows

NB! Budgeting and Forecasting

3. Managing your cash flows (cont)

Why is this doubly important? Understand the detail of your business cash inflows and cash outflows Profit vs. Cash Budgeting and forecasting has to be an ongoing process (assess weekly,

monthly basis) Working capital (creditors, debtors, inventory) vs. major capital investments Fixed vs. variable cost analysis

4. Know (analyse) your financial position

Assessing your business relative wealth or financial condition

4. Know (analyse) your financial position (cont)

Evaluate/analyse your financial statement (NB! but they don’t tell the whole story)

Provide a picture of you business at a given point of time or over a period of time

Employ financial analysis tools on organised collection of data, i.e. Statement of Comprehensive income (P/L), Statement of Financial Position (Balance Sheet), Statement of Cash Flows

Incl. performance on production and productivity, profitability, liquidity, working capital, fixed assets, social, etc.

Type of analysis differs according to particular interest


Trade creditors – interested in liquidity of your business (can you pay on

time)

Investors – interested in present and expected future earnings incl. stability

of those earnings (profitability and financial condition)

Bond/Loan holders – interested in cash flow ability of your business (major

sources and uses of funds, capital structure, sustainable profitability)

Management – everything! Better financial condition and better performance,

internal control (prevailing financial condition, evaluation of opportunities,

return on investments given the investment in assets etc.)

Techniques/tools of performance analysis


Ratio analysis (accounting technique) – numerical relationship between one or two things → Liquidity ratios – can you meet short-term financial commitments as they become

due? Current (and quick) ratios, cash ratio, working capital

→ Profitability ratios – ability to generate earnings relative to sales, assets and equity? Gross profit margin, profit margin, return on assets/investment/equity

→ Capital structure/Leverage ratios – can the business meet its financial

obligations (compare debts to assets)? Debt ratio, interest coverage, assets to net-worth, debt-to-equity



→ Activity ratios (operating/management ratios) – efficiency with which the business uses its assets (inventories, debtors, etc.) and fixed (or capital) assets? Average collection period, inventory turnover, fixed assets turnover, creditors days

Trend analysis – looking at changes in an item or group of items over a period of

time (year(s)/month/quarter/industry comparisons). Also help predict what will happen.



WHAT REALLY REALLY MATTERS → Can you produce, can you sell at a profit, can you collect the CASH?

Remember CASH IS KING!

5. Risk management

Viewed as a negative – exposure to danger or hazard

5. Risk management (cont)

Where there is Upside, There is Downside and the Converse is True!

Taking risk and dealing with uncertainty are essential parts of doing business.

As an entrepreneur you organize production and incur risks – uncertainty

in conducting your business operations is inherent Risk Taking Value creation

What is your Business Risk Profile?


Major step in appropriate oversight of risk taking is to list all the risks that you’re your business is potentially exposed to. Categorise these risks.

So you need to be honest, clear and explicit about the risks faced.

Acknowledge (positive and negative effects) and treat them as follows: → Risk that should pass to the owners → Risk that should be hedged → Risk that should be exploited

Classify risks faced by your business


Example of different categories → Operational risk – business operations (efficiency, supply chain,

cycles) → Financial risk – credit (default/downgrade), price, liquidity (cash

flows) → Strategic risk – demographic and social/cultural trends, reputation

(bad publicity, etc.), regulatory and political trends → Hazard risks – fire and other property damage, theft/crime, diseases

Consult a financial advisor on risks you can reasonably insure

6. FACTS ABOUT SMMEs in South Africa

6. FACTS ABOUT SMMEs in South Africa Critical to growing South Africa’s (entire Africa) economy

Constitutional mandate to promote economic development

Play vital role in South Africa’s economic development (restructuring local

economic base)

Job creation (socio-economic issues) – 80% of new jobs from new businesses

Partnership with government – numerous support programmes

→ Contribute 40% to GDP

→ Key in future growth

→ New B-BBEE – supplier/enterprise development now at 40% (thus focus

has now dramatically shifted to small/medium company development

1. Book-keeping 2. Financial planning 3. Managing your cash flows 4. Know (analyse) your financial position 5. Risk management 6. FACTS about SMMEs in South Africa

(even Africa)

Summary – we spoke about….


Questions….


Thank You

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