Financial planning advice for entrepreneurs

In a country where over 30% of the population is unemployed, the need for small and medium-sized businesses (SMEs) to succeed is critical. A 2022 International Financial Corporation report estimates that micro, small and medium enterprises (MSMEs) constitute more than 90% of all formal business in the country, employ 50% – 60% of the workforce, and contribute 34% of GDP. That said, this sector has stagnated and it is estimated that South Africa’s early-stage entrepreneurship rate is three times lower than it should be. Local SMEs face a wide range of well-documented challenges that see around 70% of them fail in the first year, compared with a global average of 20%.

SMEs include small businesses, medium-sized enterprises, family businesses, informal micro-enterprises, street traders, and home-based services – with these types of business being generally  innovative and quick to bring new ideas to the market. That said, SME owners face significant challenges which include (but are not limited to) accessing 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 businesses fail within this period – with a primary reason being 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 one’s business. Lack of funding remains the greatest barrier to entry for young entrepreneurs who have not had the chance to amass personal wealth, although with well-considered planning and careful strategising, successful entrepreneurship may well be within reach.

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, cash flow, salaries, risk management, sales projections, profit margins, and break-even points. Remember, any financial institutions and venture capitalists that you approach for funding will want to see a realistic, workable business plan so, if necessary, seek advice on how to structure a powerful business plan.
  • 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 has different advantages and disadvantages in respect of ownership, personal risk, tax, costs, administrative complexity, and future succession, and it is best to weigh up your options with an expert.
  • 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, but it is also 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 as you will want to avoid falling foul of SARS at all costs.
  • 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 cash flow: There are many hidden and unforeseen costs when it comes to setting up a business and keeping a careful eye on your cash flow – 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 cash flow 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 overlooked. 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, and 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 cut 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 that 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 a 2020 FMI report, 87% of all claims paid were in respect of income protection as a result of either permanent or temporary disability as a result of injury or illness. 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 or even longer.
  • 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 be 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.

Have a wonderful day.



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