Essential tips for budgeting smartly
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.