Taking the phobia out of finance

Money is rarely just about the numbers. For most of us, it is attached to emotions: fear, guilt, pride, and – especially for entrepreneurs – anxiety. Money is tied to social status, frequently used as a measure of success. We know people make comparisons: we half-expect judgement if we’re not bringing in the big bucks, or jealousy if we are. We’re indignant if someone is earning more than we do for equivalent work, and we’re guilty-embarrassed if the reverse applies.

For entrepreneurs, that’s just messed up; it’s something every one of us needs to overcome. If we don’t engage with money, we risk financial illiteracy. And that, says Cirsten Claassen, the Chartered Accountant (CA) founder of outsourced accounting company Finvoke, is a fast track to business failure.

Cirsten, pictured above talking with Heavy Chef’s Nasi Hako, was speaking at a V&A Waterfront Learning Lunch, one of a series held in partnership with Heavy Chef that brings SMMEs across the precinct together in a co-learning space, building community and mutual problem-solving. Cirsten speaks the language of SMMEs: he left the world of the Big Four and founded Finvoke after friends who had started small businesses called on him for ad hoc support. “I saw the need. Small businesses don’t have the funds or the volumes to employ a full-time accountant.”

As a startup itself, Finvoke taught Cirsten some good lessons that he brings to bear in his dealings with his clients. “Everyone says the hardest part of a business is starting one; in fact the hardest part is sales. It took a long time to build up a client base.”

Problems and habits

The common problems he has seen among small businesses:

• Misunderstanding the need. Early-stage startups may think they’re too small to worry about compliance issues, and would often come to Finvoke two or three years into their tax journey. Unpicking everything and resolving the issues then is way more complicated. Similarly,  In the early days of a business, you’re focused on cashflow; businesses usually don’t have accounting software so they are unable to do what they need to do.
• Confusing business with personal life. “Usually they don’t pay themselves a salary, and just use the business to buy their groceries, for instance.” They don’t have separate bank accounts. This, says Cirsten, makes life difficult, as SARS is highly tuned in to unexplained income and questionable expenses on personal bank accounts. (The exception may be a sole proprietor: more on this later).

The good habits Finvoke seeks to encourage in its clients:

• Understand compliance requirements, and get the tools that help you achieve those. Many accounting packages provide good basic tools.
• Don’t leave it to “the experts”. Even if you have outsourced accountants, there’s a gap between them and your business, so engage with your financial information habitually and raise your hand for  anything you don’t understand. Cirsten cited an example of a client who has a regular hour-long Friday “date” with her finances, focusing on the paperwork, and identifying where she needs advice. Look at your financial info as a data set, he suggested. Interact with it. Develop a deep understanding of the economic units behind your business. Play around with AI – ask questions.
• Get into the habit of budget forecasting. You don’t need this to stay afloat. But without one, you are operating on gut feel, which means you’re likely to be reactive. Income statement, overheads, fixed costs…. these things don’t change. But how do you predict sales? That’s the crux of forecasting. What’s your pipeline/what’s the seasonal pattern? “For me the simplest is to extract your financial history and understand it; play with the figures; see where you get,” said Cirsten. A budget has one job: if a big cost or opportunity comes in, do I say “yes”? It brings intentionality into the conversation. It means you’re able to make informed decisions rather than emotional, reactive ones.

Cashflow

One of the big issues every business deals with is cashflow unpredictability.  But often, Cirsten pointed out, having the cash to meet your obligations is down to timing. In your “dates” with your finances, map out the rhythm of your incomings and your creditor obligations. – weekly monthly, seasonally. Look at that map and find out what you can find out – are you paying suppliers sooner than you have to, for instance, at the expense of other obligations? Understanding and working with the rhythm is your best way to cut money stress.

Two particular tips he shared with the room were to:

• Build up reserves. From the cash that comes in in a good month, is there a percentage you can start putting aside to tide you over the weaker months? The size of your reserve is highly individual, and depends on your fixed costs, your vulnerability to seasonality, and other dimensions. Once you understand the rhythm of your business, you’ll know what your target here is.
• Create a separate account for VAT. That 15% is not your money; it needs to be paid over. Given the lags that apply, it’s another way of building up a cushion, which you can put towards your provisional tax. (If you don’t have that 15% left after your expenses, Cirsten said, perhaps you need to look again at the costing.) Pop this amount into a business call account or a seven-day call account – something that attracts a bit of interest.

If the worst, happens, and you find yourself in a cashflow crisis, his advice is to (a) settle the keeping-the-lights-on bills first; and (b) stop the bleeding as much as you can, by identifying which variable costs you can cut, and by having proactive and honest conversations with suppliers around their payment term flexibility. If possible, avoid drawing on overdraft facilities: they’re expensive, their interest rates are high, and you don’t want to add interest costs to your future cashflow challenges. “Borrow only if you have to,” said Cirsten. “Borrowing doesn’t ‘fix’ a cashflow issue.”

The VAT question

With the VAT threshold now at R2,3m a year, which is higher than the turnover of some businesses, should you nevertheless register for VAT?

That, said Cirsten, depends on your business model. If your suppliers charge VAT, it’s worthwhile registering, as otherwise it means you’re absorbing that 15%. On the other hand, if you don’t have a lot of expenses that attract VAT, and you’re not over the threshold, it might not make sense to register.

If you’re already registered for VAT and want to de-register, be warned that it’s a bureaucratic nightmare so get help.

Sole proprietor vs Pty: what do you have to look out for?

As a sole proprietor, you are seen as the business – there’s no separation. On the upside, there is very little compliance cost – there’s just provisional tax to pay. On the downside, sole proprietors are under more scrutiny from SARS, so many expenses become more questionable. “SARS wants to verify almost 80% of our clients who are sole proprietors.” Also, tax is higher: sole proprietors are taxed at their marginal rate; where Pty tax is capped at 27%. Refer also to the Small Business Corporation Rule (there’s a useful explainer here) but the summary is: if you generate more than R50-R80k a month as a sole proprietor, you’re paying more tax – so register as a Pty.

ABOUT THE SMME CLUSTER:

SMMEs work in a famously challenging social and economic environment. The V&A Waterfront’s SMME Cluster, which drives the Learning Lunches, is about establishing a mutual support system for SMMEs in our network, and working together around shared challenges and opportunities. Our goal: a more resilient, innovative and flourishing SMME community. 

ABOUT HEAVY CHEF

Heavy Chef is a learning community for entrepreneurs (the name comes from the saying “never trust a skinny chef”). It aims to inspire entrepreneurs to start, then empower them to succeed. It runs learning programmes for hundreds of entrepreneurs each year, and has a community of 50,000+ entrepreneurs. V&A Waterfront’s Learning Lunches are among its programmes.