Your financial plan forms the crux of setting up a new business.
It will reflect:
- your ambitions for the future;
- how profitable in terms of the return on equity the business is likely to be;
- the finance needed to establish it;
- the source of finance available and the use to which these funds will be put; and
- the date by which the business is likely to become self-supporting, generating sufficient revenue to cover running costs.
Assuming that you would want your company to be as financially independent as possible (i.e. under your own financial control), you will need to own at least 51% of the share capital. Unless you have enough cash resources, you will have to finance your enterprise (at least in part) by generating a positive cash flow though the actual operation of the business, and by tapping outside sources of capital, provided the latter do not impinge on your ownership.
Many owner-managers make the mistake of establishing their business on very thin equity investments with less than the desirable amount of working capital. Also, seek the advice of a professional accountant as you as entrepreneur, does not have all the knowledge and skills required in terms of the legal and admin requirements.
To succeed, it is very important for you to develop your financial management skills, so that you are able to plan for controlled, successful development. The small business’s vulnerability, and its lack of resources that are readily available to larger organizations, mean that access to financial information is particularly vital.
To be able to use this information effectively, you need to understand financial tools such as Balance sheet, Income (profit-and-loss) statement, Cashflow- statements, cash budgets, break-even analyses, and financial ratios.
So before formulating the financial plan, you will need to understand the use of records, statements, analysis, management, and planning in relation to money. Your accountant is a valuable source of information and a relationship that should be kept forever.
One of the most significant aids to efficiency will be access to current information. While it is possible to depend on your memory for some things, nothing should be left to chance. It is important to have a proper system for compiling, recording, and analysing the large amount of business data needed to make sound business decisions.
All businesses, no matter what their size, need a accounting compare current performance with forecast targets and past results, to provide figures for operating statements such as income and cash flow statements and a balance sheet, and to make it easier to prepare income tax returns for the Receiver of Revenue.
Accounting information is made up of records of transactions, translated into meaningful accounting language. Without a good bookkeeping system, you will soon lose direction. Those small businesses which have gone bankrupt have often done so because they failed to keep proper accounting records, which would have provided them with the up-to-date information necessary for survival. Good records are a fundamental tool of management. They should ideally be able to highlight sales (by area, person, and product); monitor material wastage, staff frauds, spoilage, and errors; determine the current cash position; as well as providing numerous other critically important facts. Again, use the services of a professional accountant and rather pay good money to invest in your admin system.
The business also needs this system to safeguard its assets and forestall errors. To maintain the system, no matter how basic it is, find someone reliable to do the job of recording each transaction. Ideally personnel who handle cash should not keep the account book, and if possible, record, analysis, and reports should be the responsibility of at least two people.
The high rate of white-collar crime in South Africa, which by itself costs the economy far more than the well-publicized hijackings, bank heists and street crime should alert you to dangers of resting cash flow in the hands of a single person. Even if you have an in-house accountant, it is a good business practice to still have an independent accountant or auditor monitor and check your books on a regular basis as they might find some irregularities that they are trained to be on the lookout for. It could save you thousands of Rands in the long run.
The Office for Serious Economic Offences in Pretoria, which battles with a huge caseload of multimillion rand white-collar crimes, gives a few pointers to sensible business practice:
- beware of the financial manager that works long hours at weekends or after hours;
- be cautious of the in-house accountant who never wants to take holidays;
- have regular audits, but be aware that a clever con artist can sometimes pull the wool over auditors’ eyes too;
- monitor your own books too; make it clear that corruption or fraud will immediately be reported to the police for criminal prosecution.
- Bear in mind this simple truth – successful crooks often do not look like criminals. One large South African publishing company trusted their books to quite, efficient bookkeepers for years, and it was only by change that they picked up a niggling item in their books – one day a director notice that flowers that were sent to the bookkeeper’s mother had been charged to the company. That led them to unravelling thousands of rand and fraud over years.
- Be vigilant. You should at least be acquainted with the basics.
The key items are:
- Original records – the pieces of paper which paper record every transaction, sales slips, delivery note, invoices, etc
- Journals – formal accounting books of original entry which record accounting debit and credit system. Various types of journals can be used, but the most essential are a cash book for recording details of all cask or current banking accounts transactions, and a general journal.
- A trial balance – list of all the ledger account balances, taken out whenever financial statements are to be prepared.
- Financial statements – including an income statement, a balance sheet and a source and application of funds statement, prepared after a trail balance has been complied. Most small businesses update financial statements information on a regular basis, for example, once a month.
Apart from financial information, you need facts on
- sales and shipments,
- selling expenses,
- gross margins,
- advertising, and
- sales promotion data at your fingertips if you want to be really effective.
You will also need information on operations:
- production scheduling,
- employee relations,
- bad debts, and
- cost analysis.
All this information should be clear, straightforward, and easily available to help you make better decisions, over and above your intuitive feel for what is going on. An information system that can highlight weaknesses in your business, together with a good accountant that can help you make sense out of all this information,aretwo great assets.