Financial advice for those building their dream

In a country where 29% of the population is unemployed, the need for small and medium size businesses (SMEs) to succeed is critical. A sluggish economy, job losses and high unemployment means that more and more people are becoming self-employed or starting their own businesses. Given that 6.6 million South Africans do not have work, this entrepreneurial trend should be encouraged and supported. According to Woolworths chairman, Simon Susman, SMEs make up 90% of formal businesses in South Africa and provide employment to about 60% of the workforce – which means that successful SMEs can have a significant impact on our economy.

SMEs include small business, medium-size enterprises, family businesses, informal micro-enterprises, street traders and home-based services. The beauty of SMEs is that they are generally innovative and can quickly bring new ideas to the market. On the other hand, they face significant challenges which include start-up funding, managing expenses until profitability is reached, and surviving through uncertain economic conditions. It is generally accepted that the first five years of business can be the most difficult for small businesses, with stats revealing that 50% of small business fail within this time period. One of the main reasons that small business fail is a lack of upfront and ongoing financial planning.

Over and above the business idea, entrepreneurs need to have financial management skills including basic accounting, cash-flow management and investment fundamentals. Developing and implementing a strong financial strategy from the get-go is essential for the future success of your business. Lack of funding remains the greatest barrier to entry for young entrepreneurs, with the 2018 Real State of Entrepreneurship Survey revealing that 88% of South African entrepreneurs are self-funded. For younger entrepreneurs who have not yet amassed any personal wealth, starting a new business can be particularly challenging – but, with smart money management and careful strategising, it can be done.

Our advice for young entrepreneurs includes the following:

  • Have a plan: A business plan is the foundation of your entire venture and is the platform on which your whole business will be built. When compiling your business plan, ensure that it includes a detailed financial plan that includes product funding, budgeting, loan repayments, cashflow, salaries, risk management, sales projections, profit margins and break-even points.
  • Choose the correct business entity: When setting up your business, seek advice on the most appropriate business entity for your purposes. In general, you have the option of setting up a private company, sole proprietorship, partnership or business trust. Each of these entities have different advantages and disadvantages in respect of ownership, personal risk, tax and administrative complexity, and it is best to weigh up your options with an expert. Once you have established your business, you will need to register it with the Companies and Intellectual Property Commission (CIPC).
  • Keep your personal finances separate: Regardless of the entity you choose to house your business, it is best to keep your personal finances and business finances separate by keeping a firewall between the two. Not only will this make your bookkeeping easier, it is essential for your personal protection, tax planning and protecting your personal assets. It will allow you to maintain your good personal credit score while building up the business’s credit record.
  • Over-estimate your set-up costs: The most common feedback from start-up business owners is that they wholly underestimated the set-up costs and the time it would take to start generating real profits. Our advice is to do your costings and projections conservatively using a ‘worst case scenario’, and then build in extra just in case.
  • Get tax advice: As a business owner, it is important to be aware of the tax obligations of running a business, bearing in mind that the entity you have chosen for your business will have different tax consequences. Difference tax compliance rules, tax incentives and tax rates apply to different entities, and it is important to understand the difference at the outset so that you get it right the first time.
  • Learn basic accounting: Understanding basic accounting is a vital skill to have if you want to run your business properly. It is not necessary to have a financial background, but it is important to grasp the fundamentals of accounting. Depending on the nature of your business, you may want to install an accounting software package to make your life easier and your record-keeping on point.
  • Manage your cashflow: There are many hidden and unforeseen costs when it comes to setting up a business and keeping a careful eye on your cashflow – both personal and business – is key. In the excitement of getting your new business off the ground, it is perfectly possible to lose track of expenditure, and our advice is to put a cashflow management programme in place and monitor it daily.
  • Pay yourself first: Although this is one of the first rules of entrepreneurship, it is often the most over-looked. Many business owners feel compelled to put everything back into their business, while at the same time compromising their credit scores, insurability and personal finances. The ideal is to be able to draw enough from the business to cover your living expenses, medical aid, insurance and to service your personal debt.
  • Limit your fixed expenses: In the first few years of business, you will want to keep your fixed expenses at a minimum – although this may involve making some tough decisions. Many entrepreneurs choose to downgrade their accommodation, drive smaller and more cost-effective cars, forego eating out, and cutting back on the nice-to-haves. If you have a solid business plan and an unwavering belief in your product, these early sacrifices will be easy to make.
  • Stay on your medical aid: Remaining on your medical aid is an imperative – even if you have to downgrade to a more affordable plan option. As a minimum, ensure that you have a hospital plan in place which covers your in-hospital at 100% of medical aid tariff. In general, medical aid network options are more affordable. Ensuring no break in membership is essential in order to avoid future waiting periods or late joiner penalties. As and when your earnings increase, you will seamlessly be able to upgrade to more comprehensive cover.
  • Protect your income: Another important reason to pay yourself an income is to secure an income protection benefit in the event of permanent or temporary disability. According to FMI, 70% of South Africans will, in their working lifetime, have an injury or illness that will prevent that from earning an income for at least 7 days. An income protector effectively insures your earnings should you become ill or disabled. In the event of a temporary disability, your income can be protected for up to 24 months, whereas in the event of a permanent disability, your income will be protected to age 65.
  • Consider business overheads protector: Should finances allow, you may wish to consider insuring your business overheads. Business overheads protection is effectively insurance for your business which provides a temporary source of income should you be unable to work through illness or disability. This cover will ensure that your business can continue to operate even without your contribution to the business, and will cover the costs of specific business-related expenses while you are incapacitated.
  • Avoid lifestyle creep: As your business starts to generate profits, you may be tempted to begin living a less frugal lifestyle by upgrading your living arrangements, buying a new car or splashing out a little. However, our advice is not to being lured into a false sense of security. If your business is going well, use your earnings to pay off loans, set up an emergency fund and enhance your offering. If you are able to increase your drawings from the business, consider setting up a retirement annuity, moving on to a more comprehensive medical aid, setting up a personal emergency fund and investing in yourself.

Being an entrepreneur involves taking calculated risks in order to achieve long-term success, ownership and financial freedom. It invariably entails making enormous personal sacrifices early on, together with some risks that might just keep you awake at night. However, as Farrah Gray is quoted as saying, “Build your dreams, or someone else will hire you to build theirs.”

Have a great Wednesday!


Build your dream before someone hires you to build theirs.

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