Es­sen­tial tips for budgeting smartly

The Sunday Independent - - FEATURES -

Ben Bier­man fac­tors. In the ab­sence of his­tor­i­cal sales data, due dili­gence into sim­i­lar busi­nesses should be done and re­al­is­tic yet chal­leng­ing sales fore­casts should be set.

Un­der­stand the macroen­vi­ron­ment in which your busi­ness op­er­ates

In today’s global econ­omy, what hap­pens in China or the US will have an in­flu­ence on your busi­ness. In South Africa, a ba­sic bud­get line item like fuel is linked to macro­fac­tors like the world oil price and the strength of the rand. Busi­nesses that rely on im­ported ma­te­ri­als, for ex­am­ple, need to have plans in place to ab­sorb ex­change-rate fluc­tu­a­tions, when to pass it on to clients and even when to start sourc­ing lo­cally rather than im­port­ing. As such, a good bud­get is plugged into the macroen­vi­ron­ment.

Do it your­self and re­vise it reg­u­larly

While ac­coun­tants are use­ful in tax and fi­nan­cial state­ments, busi­ness own­ers have the best knowl­edge of ex­pected lev­els of sales in com­ing months, as well as the ex­penses to be in­curred in or­der to meet those sales.

It is there­fore ad­vis­able to draw up your own bud­get and ap­proach ac­coun­tants only to as­sist. The value of a bud­get comes to the fore when an en­tre­pre­neur re­views, con­sults, adapts and com­pares the fore­cast fig­ures with the ac­tual fig­ures, at least once a month, in or­der to iden­tify ma­te­rial vari­ances. If not, sales dip and ris­ing ex­penses will be no­ticed when it is too late.

Bud­get for ex­tra cash

Budgeting is not only to pre­vent death by cash-flow crunch, but also to help en­trepreneurs plan for what to do with ex­tra cap­i­tal. Sen­si­ble bud­gets in­clude plans to in­vest ex­tra cash into ac­ces­si­ble short-term money mar­ket ac­counts, for ex­am­ple, or into longterm in­vest­ments, such as buy­ing a build­ing if the en­tre­pre­neur is sure that in­come and prof­itabil­ity can be sus­tained.

Un­der­stand the dif­fer­ence be­tween fixed and vari­able costs

Fixed costs are those that stay the same no mat­ter how many sales are made in a month. These in­clude rent, salaries and loan re­pay­ments. Vari­ables, as the name im­plies, vary as the level of sales vary. These in­clude raw ma­te­ri­als and com­mis­sions. Fail­ure to un­der­stand the dif­fer­ence means that a busi­ness owner is not able to use cru­cial busi­ness man­age­ment tools such as gross profit ra­tios and breakeven anal­y­sis.

Be ready with Plan B

New busi­nesses should have two bud­gets – one for when things go well and an­other for when things turn bad, which should in­clude a break-even sce­nario and re­flect the min­i­mum sales re­quired to meet over­heads and keep the busi­ness go­ing. Sen­si­ble busi­ness own­ers should have a plan for when their bud­get suf­fer a ma­jor knock such as the loss of a ma­jor client or ag­gres­sive com­pe­ti­tion. En­trepreneurs have the tem­per­a­ment to live with such risks, but it is best to mit­i­gate them by plan­ning for all pos­si­ble sce­nar­ios, al­ways keep­ing the bud­gets close at hand.

At the best of times, budgeting is one of the most im­por­tant habits that sep­a­rates thriv­ing busi­ness own­ers from the mass of strug­gling busi­nesses. When times are tough, the abil­ity to bud­get ef­fec­tively be­comes a mat­ter of sur­vival. MUL­TIDI­MEN­SIONAL poverty is a win­dow through which the bas­ket of ser­vices – the so-called so­cial wage – South Africa pro­vides es­pe­cially for the poor.

Money met­ric mea­sures show how de­prived of money or pur­chas­ing power peo­ple are, but mea­sures based on pro­vi­sion and ac­cess to ser­vices give a pic­ture on how poverty is im­pacted. These ser­vices range from wa­ter and elec­tric­ity, to so­cial grants among oth­ers.

This ar­ti­cle is about the level of ex­pen­di­ture in­curred by mu­nic­i­pal­i­ties to pro­vide ser­vices to the pop­u­la­tion. These are not en­tirely free across the pop­u­la­tion, but are free in the case where the in­di­gent are tar­geted.

Turn on a tap. Switch on a light. Use the mi­crowave. Take the bus to get to work.

Your daily life is filled with hun­dreds of small in­stances where you de­pend, in some form or an­other, on ser­vices your city or town pro­vides, be it run­ning wa­ter, elec­tric­ity or pub­lic trans­port.

Ser­vice pro­vi­sion is the pri­mary man­date of South Africa’s 278 mu­nic­i­pal­i­ties. Ac­cord­ing to Stats SA’s lat­est fi­nan­cial cen­sus of mu­nic­i­pal­i­ties re­port, to­tal spend­ing by mu­nic­i­pal­i­ties amounted to R310 bil­lion in 2016.

That’s R5 584 per person if we con­sider South Africa’s pop­u­la­tion of 55.6 mil­lion, as it was in 2016.

Two dis­tinct group­ings oc­cur in the data when we take a look at per capita spend­ing across metropoli­tan and lo­cal mu­nic­i­pal­i­ties, rep­re­sented in the graph above.

The first dis­tinct clus­ter are the eight metropoli­tan mu­nic­i­pal­i­ties, clus­tered to­gether in the higher end (to the left) of the spend­ing range. Four met­ros spent be­tween R8 035 and R8 446 per res­i­dent, with Tsh­wane the top spender, fol­lowed by Ekurhu­leni, Jo­han­nes­burg and Man­gaung.

The coastal met­ros find them­selves a lit­tle lower down, with Cape Town, eThek­wini, Nelson Man­dela Bay and Buf­falo City fall­ing be­tween R7 708 and R6 742 per res­i­dent.

The rel­a­tive dom­i­nance of the met­ros is not sur­pris­ing. In 2016, the met­ros were home to 40 per­cent of South Africa’s pop­u­la­tion but were re­spon­si­ble for 56 per­cent of to­tal mu­nic­i­pal spend­ing. What about lo­cal mu­nic­i­pal­i­ties? The Mu­nic­i­pal In­fra­struc­ture In­vest­ment Frame­work (MIIF) pro- vides a use­ful clas­si­fi­ca­tion of lo­cal mu­nic­i­pal­i­ties, di­vid­ing them into four dis­tinct groups. These are: sec­ondary cities, mu­nic­i­pal­i­ties with a large town as its core, mu­nic­i­pal­i­ties with small towns, and mu­nic­i­pal­i­ties that are pre­dom­i­nantly ru­ral.

The sec­ond dis­tinct pat­tern that emerges is re­lated to pre­dom­i­nantly ru­ral mu­nic­i­pal­i­ties.

These clus­ter at the lower end (to the right) of the per capita curve. In sharp con­trast to met­ros, ru­ral mu­nic­i­pal­i­ties were home to 24 per­cent of the na­tional pop­u­la­tion in 2016, but they spent just 6 per­cent of the to­tal mu­nic­i­pal bud­get.

Lo­cated mostly in KwaZu­luNatal, Eastern Cape and Lim­popo, ru­ral mu­nic­i­pal­i­ties ex­hibit one strik­ing dif­fer­ence in terms of how they spend their money: they de­vote very lit­tle to pur­chas­ing elec­tric­ity.

Ur­ban mu­nic­i­pal­i­ties can spend up to a quar­ter of to­tal ex­pen­di­ture buy­ing elec­tric­ity from Eskom, which they then re­sell to res­i­den­tial, busi­ness and in­dus­trial cus­tomers.

This process gen­er­ates a fi­nan­cial sur­plus that they use to fund other ac­tiv­i­ties.

Many ru­ral mu­nic­i­pal­i­ties, how­ever, do not take part in the elec­tric­ity trade. Eskom pro­vides power di­rectly to cus­tomers in ru­ral ar­eas without the mu­nic­i­pal­ity tak­ing on the mid­dle-man role.

As a group, ru­ral mu­nic­i­pal­i­ties spent only 6 per­cent of their bud­gets on pur­chas­ing elec­tric­ity in 2016, far lower than the na­tional mu­nic­i­pal av­er­age of 23 per­cent.

With Eskom fully re­spon­si­ble for elec­tric­ity dis­tri­bu­tion, ru­ral mu­nic­i­pal­i­ties are not bur­dened with the high costs associated with in­fra­struc­ture devel­op­ment and main­te­nance.

The same ap­plies to wa­ter and san­i­ta­tion. Dis­trict mu­nic­i­pal­i­ties have taken over the re­spon­si­bil­ity for sup­ply­ing wa­ter and san­i­ta­tion in many ru­ral ar­eas in Eastern Cape, KwaZulu-Na­tal and Lim­popo.

The ma­jor dis­ad­van­tage of this is that ru­ral mu­nic­i­pal­i­ties miss out on gen­er­at­ing their own rev­enue. Whereas met­ros and towns rely on rev­enue gen­er­ated from sell­ing ser­vices, ru­ral mu­nic­i­pal­i­ties de­pend heav­ily on grants from the na­tional gov­ern­ment to sup­ple­ment their in­come. Ru­ral mu­nic­i­pal­i­ties might be spend­ing less, but com­pared with towns and cities, they pro­duce far less in­come.

Find out more about daily life and the coun­try in which you live by ex­plor­ing more ar­ti­cles here: http:// www.statssa.gov.za/?page_id=624.

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