Financial literacy is defined as the ability to use knowledge and skills to effectively manage your financial resources for lifetime financial security. According to research by the Financial Services Conduct Authority, South Africa has a financial literacy rate of 51%.
This is primarily driven by fear and the perception of financial information being highly technical. This means that roughly one out of two people is likely to avoid financial decision making, leaving it to someone else. As an accountant, I come across many clients who struggle to understand the debit and credit aspects of their businesses. Understanding the numbers is not just about debit/credit accounts, but also about understanding financial terminology and reports. It also includes understanding the business structure that is right for you (e.g. sole trade, partnership or private company), how to build a budget for your business and how to manage your company’s cashflow.
MANAGE THE FINANCES
Here are a few examples of what not to do when it comes to managing the finances of your small business. This list is a summary of the common pitfalls according to Ken Ngcobo, head of credit at First National Bank
One bank account
As an entrepreneur, it’s sometimes difficult to separate yourself from your business, but it’s necessary. Keep the business and personal banking/financial information separate. Although this is not a requirement from a legal or tax perspective, it just makes life easier when trying to account for revenue.
Cost management
The first five years of a business are the most challenging as you try to build a sustainable business with a steady cash flow. It is therefore not wise to have costs such as rental, staff, etc. You need to ensure that your business is the right size for its current, and not future, financial position.
Communication
There are stages when the business does not do well; pressure to compete with large companies when employees and suppliers are not corporates in terms of appearance and being paid and the bank is knocking size. This often leads them to end up.The normal human reaction is to ignore everything, and hope things get better. But, that is the worst thing you can do because a lack of communication is a known killer of relationships. This could have a devastating impact on the company’s relationships with key stakeholders.So, ensure that you proactively communicate when you can’t meet your obligations.
The tax man
As many South African celebrities can testify, lack of taxation management can result in financial ruin. One of the biggest pitfalls of small business owners is not understanding all the taxes that they are liable for, such as:
Value Added Tax (VAT) – understanding what is vatable and what is not.
Income Tax – which expenses are deductible, and which are not.
Timing – the timing of submission for various returns, e.g. VAT every two/three months and the differing income tax (annual and provisional) submissions.
Information is power
It is important that you understand how much everything costs, so that you price your goods and services appropriately. In a sense, every amount that comes in and out needs to be accounted for. The goal for every transaction should be to have a profit-related motive and to keep a detailed record of transactions.
Budgeting
A key strength of any business is to accurately and timeously forecast the income and expenses for the current and upcoming financial periods. It’s not good enough to only set a budget; it needs to be a living document that’s appropriately adapted to the changing circumstances of the business. It also needs to have provision for your expenses and a little extra in case of emergency.
Ask for help
If numbers are generally not your strong point, government agencies such as the National Youth Development Agency, National Empowerment Fund, Small Enterprise Finance Agency, as well as commercial banks offer free resources and training material to assist you to get better comprehension of the financial information of your business. If this is not an option for you, YouTube has many resources that are readily available for you, and all you need is a stable internet connection and the willingness to learn.
TIP: As a small business owner, a deep understanding of your company’s financial situation drastically improves your chances of long-term success. When you know exactly where your finances stand, you can plan and avoid common financial management pitfalls. Remember the phrase: ‘Turnover is vanity, profit is sanity, but cash is king’. This means that if your financial statements are showing a profit and your bank account is showing a negative, there is something fundamentally wrong. This is because cash on hand is what ultimately matters. And, in a country where the survival rate for small business is only one in five over a five-year period, it has become more important than ever for small business owners to give themselves the best chance of success by understanding the numbers within their businesses.
Also see: 6 Tips To Grow Your Small Business
