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How not to manage your business and personal finances

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Cashflow.jpgPrinting Pain* is a home based family business. There were no employees besides the married couple, the Spenders*, who were the owner managers. The annual turnover and net profit of the business before owner’s salaries and company income tax were R1, 4 million and R440, 000 respectively.

Despite its profitability, Printing Pain was unable to pay its debts. It owed SARS Vat, employee’s tax, interest and penalties and payments to some of its suppliers were overdue. Furthermore, the Spender paid some of their personal expenses out of the business account and did not keep an accurate record of their drawings. The distinction between business and personal expenses became blurred.

The business accounting records were also not updated regularly. It was impossible to exercise proper financial control or take informed business decisions.

Printing Pain had only are major customer which accounted for the major part of its turnover. This customer often paid late, which had a severe negative impact on the cash flow of the business. This was compounded by the inability of the Spenders to control their personal spending habits. Their combined monthly drawings from the business exceeded the available net profit. To make up the shortfall payments to suppliers and SARS were withheld and they incurred interest and penalties because payments to SARS were overdue.

I advised the spenders to tackle the problem on two fronts. Firstly, I suggested that they find a few more customers to reduce their dependency on the single major customer. Printing Pain rendered a great service. Notwithstanding a short lead-time, the Spenders would work long hours to insure that the printed material was delivered to the customer on time.

Painful Print was in a niche market and direct marketing methods were appropriate. They failed to capitalize on this and continued to rely on the single major customer, who used its dominant position to force Painful Print to discount its prices.

I also advised the Spenders to draw up a budget for Painful Print and a personal budget in order to manage the finances of the business and their personal finances more affectively. The Spenders failed to curb their spending habits. They then applied to increase the bond on their home in order to pay SARS. This was not the first time that they had done this.

The lessons from this case study are:

  • Don’t rely on a single major customer or distribution channel unless you have a proprietary product, technology distribution agreement or other similar barrier to entry.
  • Control your personal spending and live within your means. Separate your personal and business income and expenditure. Prepare a personal budget and transfer a fixed amount each month from the business to your personal account after making provision for the employees’ tax.
  • Prepare a business budget at least annually. Keep your business accounting records updated regularly, either manually or using an accounting package. Review the actual and budgeted figures, preferably on a monthly basis. If you are using an accounting package, you can load the budget and generate monthly reports, which compare the budget and actual results.
  • Avoid penalties and interest by paying your taxes on time. The interest and penalties are not tax deductible. This makes it a very expensive source of finance.

*Printing Pain and Spenders are not their real names. 

Article written by Robert CA Jewell B Compt  B Compt Hons  MBA (Wits) CA (SA), Partner at accounting for entrepreneurs. For more information e-mail robert@a4e.bz 

Copyright (c) 2016, the credited author
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