7 BIG THINGS A SMALL BUSINESS MUST PRACTICE


20 Mar

Author: M Bhebhe CA(SA)


Have you often wondered why corporates consistently find themselves surrounded by inefficient processes that they struggle to get rid of? Is your business currently small and these corporate challenges keep worrying you? Well, it is worth understanding the link between the challenges faced by corporates, which, believe it or not, often traces its source to where the business started. 

There is an old adage that states that "Old habits die hard". Most of the habits that we learn in our youth may oftentimes become the core foundation of what we become. Similarly, the habits that are developed by a business during its infancy tend to follow it even when it has grown to the size of a corporate. It takes a huge amount of effort to change later, than it is to change things in the beginning stages. There is an old Zulu saying that goes, "sigotshwa sisemanzi", meaning that its easier to shape the core of an issue earlier rather than later. 

As a small business, it is important to set up your business and operate it the way you would want to see it when it matures into a corporate. Visualising your business at maturity is critical in deciding on what is critical to address earlier in the business' life cycle. 

1. Separate the business owner from the business transactions

The ability to ensure that your transactions as an entrepreneur are separated from those of your business is critical to the success of your business. This ensures that the business' performance is clear to understand and therefore, easy to identify the true areas of growth potential and blind sides. A number of entrepreneurs struggle with doing this, often taking cash out of the business for personal transactions or making use of business assets without recording these under the business. This causes a number of challenges for the business, including non-compliance with the Companies Act requirements which may result in the entrepreneur facing criminal charges. 

It is is important to note that by law, a company is a separate legal person and is treated differently from an individual. Simply put, it is a complete "no" for company resources to be converted for personal use outside of recognisable contractual arrangements with the business. To be able to separate the business owner's transactions from those of the business, the following key elements should be considered; 

  • instances where the business owner utilises the business resources for his/her personal transactions or to his/her personal benefit are not allowed in law. This contravenes a number of regulatory requirements including, amongst others, the Companies Act, the Income Tax Act and the Value Added Tax Act; 
  • every business, irrespective of its size, should ensure that all its transactions that the business enters into are accurately and timely recorded in the business' general ledger. This ensures that the business' records reflect the results of its operations accurately in the financial and tax year to which those transactions relate; 
  • in the event that personal transactions have been carried out, these should be supported by appropriate agreements/invoices and are correctly treated for VAT and Tax purposes in the business' records;
  • all bank transactions in the business should reflect those of the business, and should not be mixed with those of the business owner. It is advisable for the business to ensure a Business Bank account exists separately from those of the owner. Any transactions in the bank account for the benefit of the owner are highly irregular and should be avoided at all times except if there are appropriate governance processes that ensure these are appropriately carried out and accounted for.

2. Employ the right people and treat them well

The culture of your business as an owner tends to follow your own personal character, views and values. Who you employ, who you surround yourself with and how you treat them will often determine the pace of your business success. It is true that most SMEs source the bulk of their employees from close family, relatives and friends. Often, these employees feel part of the family and are able to understand the tough times that come with the business challenges. However, they are not always well equipped to be the agents of growth and change for the business. The informal nature of these arrangements tends to be the key contributor to the pace of growth in the business. It is better to employ relatives who are adequately skilled to enable the running of your business for success than to simply employ on the basis of the relationship to the owner. 

As an entrepreneur  it often sounds plausible to plough back to family to cover the burden of reducing dependence through offering employment. If indeed an entrepreneur is pushed by social factors such as reducing dependence and cutting costs by employing relatives, it maybe more sustainable and effective to employ capable people to drive growth in your business. This enables the entrepreneur the opportunity to carry out those responsibilities that pertain to family responsibility. Ensuring that your employees are treated professionally and fairly will yield the appropriate culture and behaviour that is a key ingredient for the success of a business. The following key elements should be considered; 

  • always keep in mind the simple fact that "cheap" does not guarantee quality. Hiring cheap labour will be potentially profitable in the short term but may prove expensive in the longer term. The quality of your employees and your ability to remunerate them appropriately ensures that your business is able to focus on the main reasons it was set up to perform. Whether you employ relatives or not, as a SME  you need to ensure that you surround yourselves with capable individuals who will drive your business in the direction they want to achieve.
  • There is undeniable belief that the principle of "Ubuntu" is a universal basis of relationships amongst most African societies. Ubuntu determines the value of relationships in any environment in the continent. The "Boss" mentality is foreign to this principle. Any environment with a "Boss" may bring with it, restraint of creativity, lack of ownership, dependency and often, an "I don't care attitude" from employees over time. In an SME environment, employees tend to multi-task and perform duties outside of defined or expected functions. It is imperative for the business owner to demonstrate the principles of Ubuntu at all times and allow such a culture to permeate through the organisation. In an African context, Ubuntu depicts the best of our behaviours, a spirit that says, "we are in this together".    

3. Ensure proper financial discipline is consistently maintainedTo a number of entrepreneurs and SMEs, "Cash is always King" and Kings run the world. In fact, a number of entrepreneurs largely use cashflow to assess the strength of their business. Not maintaining your financial records as a business is similar to driving a loaded taxi on a narrow road that is surrounded by mountains and dangerous cliffs all this while blindfolded. Just because the tank is full of petrol does not mean the driver should worry less about other aspects that could make the journey memorable for his passengers. In fact, the full tank may turn out to be a ticking time bomb. Managing a successful business requires the driver to take note of all key aspects of the metrics that ensure that the trip is safe, directed towards the planned destination and for the consistent comfort of its employees and stakeholders.  

The financial results of the business extend beyond cashflows and constitute a significant indicator of performance and verifiable clarity of the results of the business. All successful businesses set themselves a clear and measurable financial target and design appropriate activities to achieve these and enhanced by appropriate financial controls. Financial discipline entails a number of key considerations which should exist in a business which include some of the following; 

  • Businesses should start off by ensuring that they set up clear strategic goals which are translated into financial targets. Setting up these financial targets is the first step towards ensuring that all concerned in the business are clear about the direction of the business and what each contribution will translate to. To a lot of businesses, failure to budget is a plan to fail as a business. Unfortunately, a number of businesses that do not set themselves these clear targets find themselves consistently flying blind like the blindfolded driver. It is more likely than not that under these circumstances, success is simply attained by "sheer luck". 
  • Each business should be managed along very clear principles and ways of doing business. The soul and success of the business is the clarity of what it does, how it does it and for whom it is doing it. There should therefore be standardised policies and procedures that employees follow in carrying out the purpose of the business. Of importance, controls should be designed and implemented to ensure that the business has a fair chance of meeting its goals. These controls are the spirit around which business is done. The financial controls define the discipline of the business and ensures that all financial behaviours and decisions are checked against expected processes. 
  • Every Rand spent by the business should be directed towards the core purpose of the business and recorded at all times. This counts for all revenues, expenses, cashflows, assets and liabilities that the entity transacts on. Often, most SMEs fail to practise discipline in ensuring that personal transactions are separated from those of the business. This results in instances where business resources are incorrectly applied to activities that have nothing to do with its core purpose, and in the process, potentially breaking the law. There should never be an instance where personal transactions are catered for by the business for the benefit of the employee unless its through an employment contract or due benefits to the individual per genuine, valid contracted arrangements.
  • Most SMEs do not keep accurate records of their general ledger and tend to transact through the bank and often through cash. This results in the entity applying what is referred to as "Cash accounting" as opposed to the appropriate "Accrual accounting" methodology. Cash accounting is where the business only records its transactions in the general ledger as a result of the movements of cash rather than when the transactions or services are carried out. Cash accounting unfortunately does not take into account into transactions that have occurred for which there were no cash movements or those cash movements are yet to occur. All transactions in the business should be accounted for in the period to which they belong, rather than when cash exchanges hands. The preparation of financial statements should be done on the Accrual basis at all times.    

4. Comply with key legislationIn this day and age, the reputation of a business and its stakeholders is fundamental to its success in the public. Reputation is not only linked to how the company conducts itself with its customers, but more importantly, whether a company is a good citizen. Compliance with appropriate laws and regulations applicable to a company should not be viewed as a choice for compliance by any entity. It is critical that each entity is clear from the onset, what group of legislation in the country(ies) it operates in and put in place policies and functions to ensure full compliance. Most SMEs do not often have the capacity and resources to maintain such functions within its environment, thus may have to either outsource this function or sign such responsibilities to an internal resource on an ad-hoc basis. However, this is a critical function in any business that ensures that the company keeps its reputation intact. 

These regulations are dependent on the industry in which the entity operates. However, certain of these are applicable across industries such as the Income Tax Act, Value Added Tax, Companies Act etc. Most of these legislator frameworks require the use of specialised skills to ensure compliance. SMEs are advised to ensure that they have access to such specialists at all times to ensure that their actions are above board. This can be a reliable and qualified person who can be placed on a retainer to consistently provide such guidance to the entity. Ignoring the applicable legislation is tantamount to breaking the law by intent. The claim of ignorance by any executive of a business is not an admissible defence in law and will result in those charged with governance in that organisation being held liable for non-compliance. We advice that all businesses, small or corporate, should ensure that they continuously investigate their adherance to applicable legislation without fail.    

5. Know your customers/clients and keep them happy

Any business that has no intricate knowledge of its clients and how it meets their needs will always struggle to grow. Our belief is that there is a difference between a "client" and a "customer" and it is important to know which category those that buy your goods or services fall under. Our definition of a is that a customer is faceless, can not be remembered and is part of a number whereas a client has a face, is known even by name and maintains a personal relationship with your business. Irrespective of which category, it is important for those that pay money to access the services your business offers to feel special. Defining the needs of your customers/clients is critical for your success as a business, irrespective of your size. A number of SMEs have the ability to be agile and versatile enough to be very personal with their customers compared to corporates due to volumes. The ability to provide customers with exceptional service leads to loyalty. Most importantly, when customers are satisfied by your service they tend to refer your business to other people. Keeping your customers happy is just about the only tool either than the quality of your product you have to keep your sales register clocking. Sometimes customers do not demand a lot, a simple recognition of their personal circumstances goes further than a classy gift. Finding means and ways of keeping your customers happy and engraining those activities into company's "way of doing business" is likely to enhance your business and its value to its customers. 

6. Manage your cashflows

Every business' blood line is its cashflow, not at a point in time, but everyday. The availability of cashflow to any business, whether small or large, determines its pace of success. The company's ability to manage its cashflows is therefore fundamental to its existence and its ability to continue. The challenges that face SMEs is often vast and a result of many factors; 

  • it is often the case that SMEs may not have established the terms and conditions to be complied with by its customers and do not always have the defined processes, capacity and resources to consistently keep track of outstanding amounts due to the company. As a result, the company is sometimes dependent on the willingness by its customers to settle within the terms. Ensuring that your invoice terms are very clear and agreed to by your customers before work commences is key to the dependability of your cashflows as a business. 
  • without a forecast view of what the financials will look like beyond today, it is difficult to manage your cashflows efficiently. A forecast position should be based on the realistic view of expectations of cashflows in the business. This enables the company to predict its cashflows timely. However, it is one thing to forecast cashflows, and another for the company to stick to its cashflow plans and avoid impromptu  cashflow decisions that derail their predictability. Ensuring that cash is utilised for the purposes for which it is intended requires discipline.
  • it is important for the business to ensure the timing of its cash-inflows and cash-outflows to ensure that these do not leave the business in a cash-strapped situation. This tends to be the case where cash-outflows exceed the cash-inflows at any point. Most SMEs are not able to influence the terms and conditions with suppliers and therefore take the stringent terms as given to them, often cash on delivery (COD). At the same time, they are not able to influence the cash-inflow terms to meet these timelines. This results in misalignment of cashflows and the start of the downward trend for the company.
  • Entrepreneurs and small business owners often find themselves mixing their cashflows with their personal cashflows that bear no significance to the business. This conflation has serious compliance implications and  compromises the chances for accessing capital form third party funders. The underlying fact is that this is a bad business practice for a business that wants to compete effectively in its respective industry. Some businesses use the business' cashflows to settle liabilities of other businesses or personal expenses. As earlier indicated, this lack of discipline to properly manage your cashflows may even lead to closure of otherwise sustainable businesses. It is critical therefore for that on the onset, entrepreneurs and business owners, get into the habit of sticking to "doing the right thing". This is achieved through ensuring that sound business principles are practised consistently and that company resources are utilised responsibly for the benefit of the entity.    

Ultimately, it is indeed true that "Cash is King". Respect the King and enjoy the rewards. 

7. Know your products/services

There are a number of instances where businesses have a proliferation of products/services to the extent that not only their customers but even their employees are confused about what the business actually does. Being a "Jack of all trades" does indeed result in one being a "master of none". The identity of a company lies in the clear definition of its products/services. It is important to be focused and deliberate right from the beginning and to define the purpose of the business and its products. While the business focus can change over time, it is indeed different from simply being everything to everyone. What is clear is that when you know your products/services well; 

  • you are able to be target your customers and align your products/services with their needs; 
  • you are able to choose the type and quality of your clients if applicable; 
  • you are able to structure your cost base accordingly and therefore, appropriately price your products/services to suit your target market; 
  • you enable the business to target its marketing efforts appropriately and therefore, get a better return for every Rand spent on marketing its products and services.  

Ultimately, businesses have all the appropriate levers to utilise to ensure success or failure at any point in their lifespans. Being aware of your capabilities, delivering them consistently to your targeted customers and ensuring that your customers are happy provides the recipe for success. Every business should be able to identify controllable and non-controllable factors that determine success for their business. Ignoring both can easily result in failure. Managing the risks of non-controllable factors and maintaining oversight on the controllable ones will enable any business to succeed. While all these principles are key, to an SME, the behaviour of the business owner will always determine the success of the business. An entrepreneur or business owner who surrounds himself with quality people will have a better chance at success. It is true however, that you can not hire quality people and then stifle their capabilities because this is a recipe for failure. 


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