Which is Better for Your Business? Lots of Rules or a Few Good Principles?

A_5Most of us are weighed down by compliance. Think of FICA, more onerous tax compliance, BBBEE, Employment Equity – the list is endless, more rules to deal with increasing complexity.

How does business manage its operations with all these external regulations?

The importance of strong leadership

Leadership plays a crucial part in any organisation and successful, sustainable businesses all have strong leaders. The example that leaders set filters down the business and becomes an integral part of the organisation’s culture.

To counter the increasing complexity of our times, many owners and senior managers use a decentralised structure to manage the business. In doing this, it is important to have the right people as managers. They need to be principled, self-motivated and prepared to be accountable.

In this type of structure, the owner or CEO sets out key principles for his/her managers to govern their sections. A key component of these principles is enforcing controls and acting when they either suspect or become aware of a breach in the company’s policies and/or controls. It is critical they follow the breach to its logical conclusion: either there is no breakdown, or commensurate action is taken against offenders.

Warren Buffett, for example, writes to his senior managers every two years stressing the organisation’s key principles and the importance of investigating any failures of controls or systems in the company. He also stresses these principles in meetings so that they become embedded in the organisation’s culture.

If breakdowns are not acted upon, an error invariably escalates until it is dealt with, by which stage it can have serious implications for the business.

Whistle-blowers – protect them

It is amazing how many people make use of hotlines or other whistle-blowing facilities.  It is relatively simple to set one up but even though the vast majority of items reported are insignificant, following up on potential frauds or other offences sends a powerful signal to the company. Staff understand their misdeeds are likely to be reported and investigated.

Whistle-blowers need to be guaranteed they will be fully protected and, if they wish, remain anonymous.

You can never discover all the breakdowns in a company but good leadership can detect most of them without loading your business with more rules, policies and bureaucracy.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

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The money market trap

A_6To the general public money market unit trust funds are safe and secure; a conservative, yet sensible investment that protects capital. This is a half-truth, as safety and security come at a cost. The cost? Inflation.

The money market is where the government, banks and companies raise capital through short-term loans from investors. Money market unit trust funds are similar to fixed deposit accounts offered by banks. Its main advantage over fixed deposit accounts is liquidity. Cash can be withdrawn at any time without penalties and there are no lock-in periods. This is primarily why returns offered on fixed deposits exceed money market returns.

Money market returns often fail to outperform inflation over the long term. This is the money market trap. It means that although the investment amount constantly increases, it will buy less and less over time. In this respect, money market unit trust funds can be risky and inappropriate to achieve long-term investment goals such as retirement or children’s education. The true risk is having inadequate growth assets to meet such long-term capital requirements.

Money market funds are, however, very useful as short-term safe-havens. It is ideal for short-term capital obligations and emergencies. In addition, individuals qualify for an interest income tax exemption of R23,800 per year or R34,500 for individuals older than 65 years. For example, a money market investment of R297,500 yielding 8% per annum would be tax-exempt, as the interest earned would equal R23,800.

As a rule of thumb it is not optimal to have more than one years’ living expenses and capital commitments invested in money market funds. If this is not the case, investors should consider rebalancing their portfolios.

By Frants Preis, CFA

Frants Preis is an equities portfolio manager at VEGA Asset Management

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

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Why invest directly offshore?

shutterstock_512738473Many South Africans are justifiably concerned that their retirement capital will be insufficient to meet their post-retirement needs. This concern is exacerbated by the recent downgrade to junk status, which has detrimental long-term investment consequences.

But there is a bright light on the bleak domestic horizon – direct offshore investing.

South Africans have the opportunity to invest in a direct offshore share portfolio using their discretionary travel allowances.  Individuals are allowed to take R1 million out of the country annually. With tax clearance an additional R10 million is permitted.

Despite credit downgrades the rand has not yet depreciated significantly. South Africans can use the attractive current exchange rate to their advantage by taking at least part of their hard-earned capital offshore to hedge against local political and socio-economic uncertainty. This should, however, not be the sole reason for doing so. Investors can gain exposure to pioneering growth sectors otherwise unavailable to them, including cyber security, electric vehicles and virtual reality. In addition, share portfolios can include international stalwarts such as Apple, FedEx and Visa.

Let us debunk two widely held beliefs:

  • Investing offshore directly is only for very wealthy persons
  • Investing offshore directly is expensive

Sadly both statements hold true in most instances. Large banks more often than not cite intensive administration as the rationale behind imposing significant minimum investment amounts (up to $500,000) and excessive fees. Maximizing profit margins is the top priority. They are unwilling to help rather than unable to help. Fortunately, there are international banks such as Swissquote that open trading accounts for smaller amounts at reasonable cost.

The global investment arena is transforming rapidly. Are your investments structured to participate in these growth opportunities?

  • Frants Preis is an equities portfolio manager at VEGA Asset Management. VEGA Asset Management has a service level agreement with Swissquote Bank AG.

Compiled by: Frants Preis, CFA

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Aggrieved Minority Shareholders – You Have Plenty of Options

A3The Companies Act gives directors substantial leeway to run a company and gives them considerable powers to do this. So how does it protect minority shareholders who disagree with how the directors operate the business?

What remedies are available to you?

  • A shareholder may seek court relief when there is “an unconscionable abuse” of the company’s separate legal persona.
  • Shareholders may “demand” that the company purchase their shares at “fair value” in the event of a:
    • Change in the company’s Memorandum of Incorporation (MOI)
    • Disposal of a large part of the company’s assets
    • Merger with another business
    • Scheme of arrangement being entered into by the company.
  • A shareholder may ask the court to protect his/her/its rights in matters affecting the MOI, company rules and company debt.
  • A shareholder may apply to court to have one or more directors declared delinquent.
  • If shareholders are being treated in an “oppressive” or unfair manner which prejudices their rights, the courts are given wide discretion. Inter alia, they can appoint new directors, restrain behaviour, change the MOI, award compensation to the prejudiced shareholder, issue shares, set aside transactions or require a trial be held.

The Supreme Court of Appeal in 2013 found in favour of a minority shareholder under this section.

  • Shareholders may institute a derivative action by demanding the company take legal action against wrongdoers who have acted in a manner harmful to the company.

Whilst we are often told the Companies Act favours directors, there are numerous avenues sanctioned by the Companies Act to address grievances of minorities.

Ask your accountant for help in doubt.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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How Many Days A Year Do You Work For The Taxman?

A2In the last few years in particular we have been aware of tax increases. The Free Market Foundation measures how many days in a tax year it takes to pay our taxes (taking total taxes over total earnings – obviously in reality we pay taxes monthly, or twice-yearly for provisional taxpayers).

Compared to last tax year, it will take us two more days to pay tax – on 22 May  we will have settled our owing to SARS and only from the 23rd will we work for ourselves. That’s 142 days (4 months and 22 days) we’ve worked for the taxman.

”Tax Freedom” Day gets later every year …

Since 1994, the number of days taken to pay tax has risen by 29 days – if we stick with the current trends, it means that each successive generation will work one extra month to pay tax.

Is this good or bad? 

It depends how government is spending its money. If the money is going on infrastructural projects that will increase productivity, this will increase economic growth over the medium term. In South Africa’s case the major trend has been the increase in the number of civil servants employed. Since 2009 our debt to Gross Domestic Product (GDP) has doubled which has put the country under unnecessary pressure and is one of the factors that alarms rating agencies.

Where to now?

One of the issues that worried former Finance Minister Gordhan was the sudden decline in “tax buoyancy” which measures how revenue collections respond to changes in national income. For example, tax buoyancy would be positive if GDP rose by 1% and revenue collections increased by 2%. In the 2016/17 year SARS fell R30 billion short of its collection target for the first time since 2009.

Potentially this can mean that taxpayers are taxed to the hilt (remember 4% of the population pay the bulk of our tax) or perhaps more worryingly, what amounts to a tax revolt is beginning. The people who pay most of our tax have the resources to avoid tax (remember that whilst “tax evasion” is illegal, “tax avoidance” using tax laws legally is allowed) or to find work in another country.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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SMMEs and BBBEE Firms – Government Wants To Do Business With You

A5The government spends over R500 billion annually on goods and services. Promises have been made for several years that government would promote small and medium-sized businesses (SMEs). Government has also promised to help emerging Black business through its Broad Based Black Economic Empowerment (BBBEE) program.

Now it has taken steps to follow through on this. From 1 April, new preferential procurement regulations have come into effect that favour SMMEs and BBBEE firms. The aim of these regulations is to channel R150 billion in procurement spend to these entities.

New regulations from 1 April – how will they work?

State and parastatal tenders depend mainly on price. In terms of the new regulations the percentage of points awarded for a tender that depend on price is 80% for tenders of R50 million or less, and 90% for tenders over R50 million.

Tenders may now be subject to pre-qualifying criteria which may contain any one of the following:

  • A minimum BBBEE (Broad Based Black Economic Empowerment) status
  • An Exempt Micro Enterprise (EME) status – turnover of R10 million or less; or a Qualifying Small Enterprise (QSE) status – turnover of R50 million or less
  • If it is feasible to subcontract a tender of more than R30 million then the business that is awarded the tender must allocate 30% of the tender to
  • EMEs and/or QSEs
  • EMEs and/or QSEs with at least a 51% Black shareholding
  • A cooperative which is at least 51% Black owned
  • Any combination of the above.

In essence this excludes companies that do not have the above criteria.

Thus, the state has put in the conditions for a large slice of its procurement to go to SMMEs and BBBEE businesses. It is now up to government and parastatal entities to use these new regulations.

SMMEs and BBBEE organisations should now follow tenders closely to see if they are eligible for a slice of this R500 billion spend.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Frightening Fraud Statistics – Protect Your Business Now!

A4A global organisation which focuses on internal (i.e. management, owners and staff) fraud, recently released some sobering findings.

Understanding them is your first step in protecting your business from serious loss.

In Sub-Saharan Africa

  • Over 60% of frauds were committed by people with a degree (in view of the large number of fake degrees consider carefully checking qualifications when hiring).
  • 82% of perpetrators were male with an average age of 38.
  • 18% came from the accounting department, 17% from operations and 11% from purchasing.

In global terms

  1. 5% of revenues are lost due to fraud. This applies to large and small entities but clearly will have a greater impact on small entities.
  2. The best method of fraud detection is by tip-off (approximately 30% of cases), followed by management review (15%), internal audit (12%) and account reconciliation (just under 10%). If you don’t have a tip-off or whistle blower policy, now is the time to do it. Most of the other detection methods come from active management control.
  • Most frauds come from asset theft and the largest (by value) from financial mis-statement.
  1. 90% of background checks did not pick up any indication of malfeasance and 82% of fraudsters had not been punished by their organisations. Something also to consider – and check with previous employers – when recruiting.
  2. Fraud losses were detected much faster and the loss was 34% less in entities with strong controls.
  3. Those committing fraud typically showed some of these characteristics:
    1. “Wheeler dealer” personalities
    2. Financial problems
    3. Living beyond their means
    4. Control issues
    5. Strong relationship with a vendor
    6. Family difficulties such as divorce.

Don’t become a “fraud statistic” – analyse the risk factors listed above and take preventative action now!

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Junk Status Is Now a Reality – How Will It Affect Us?

A1Events have moved swiftly – on 31 March the Minister of Finance and the Deputy Minister were axed. Ratings agencies Fitch and S&P downgraded South African debt to junk status the next week.

Why the muted response?

In December last year when Mr. Nene was replaced as Finance Minister, it appeared we had fallen off a cliff – the Rand tumbled and interest rates spiked sharply. Since then there were four attempts to replace Mr. Gordhan and thus the market was not surprised by the events of 31 March.

Yet there have been consequences – interest sensitive stocks have dropped R190 billion, South African bonds have shed R100 billion in value, the Rand is 10% weaker versus the US dollar and the cost of financing South African debt has increased by R1 billion per year.

The events so far …           

Two of the major rating agencies – Fitch and S&P – have downgraded our foreign denominated debt to junk status. Fitch has also downgraded our Rand denominated debt. Usually for rating downgrades to trigger selling of country assets, two of the three agencies need to declare junk status. As our foreign denominated debt is only 10% of our debt, the response has not been as dramatic as many expected. If our local debt receives a downgrade from Moody’s (they are deciding how to react to March’s events) this will have a much greater impact, particularly as 35% of local debt is owned by foreign investors.

We have been in junk status before following a debt default in the mid 1980s and we came out of junk status in 1999.  See this chart of our grading history since 1994 –

A1

Source: Adapted from a Nedbank chart

Now what?

The new Finance Minister and his team need to rapidly re-establish credibility in the Treasury. The path of only paying what the nation can afford should remain in place and controls over State-owned entities (such as Eskom) should also be built on.

Mr. Gordhan had the confidence of offshore investors and both Fitch and S&P made it clear they feared that South Africa would not stick to current Treasury policies.

We can go one of two ways:

  • Move along the path feared by ratings agencies which will lead to further bailouts of State businesses and increased government spending, e.g. on the nuclear program. This way will lead to lower or no economic growth and a steady downward spiral which could end up in further downgrades and an IMF bailout.
  • Maintain the fiscal stance of the last twenty years which could prevent further downgrades and see the country in a year or two emerging from junk status.

The man in the street

There will be less disposable income as petrol price hikes, a declining currency, more interest rate rises and stagnant economic growth curb our ability to improve living standards.

What is concerning is that surveys show that 30% of even “well-off” South Africans (i.e. they live comfortably and can cover future unplanned expenses) would struggle with an unexpected bill of R20,000. More and more people live at the margin and will be at even greater risk from the downgrade.

We can also expect unemployment to rise and investment to drop (particularly as foreign investment will substantially reduce). Considering GDP per head has not grown since 2013, you have to question how long the social fabric can hold.

Fin24’s powerful Infographic “How Junk Status Will Affect You” below says it all –

A2

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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Blockchain Technology is Coming – Could Your Business Use It?

A5_LBlockchain offers exciting possibilities of what new technology can achieve.

What is blockchain?

It is a transparent, secure and tamper-proof method of storing data. It can also be updated as new transactions are added. Bitcoin has become the most recognised user of blockchain.  For a fuller explanation of the concept watch “What is blockchain?” on YouTube.

Why is blockchain technology so powerful?

Think how many people in Africa send remittances back to their families in different countries or the complications of importing and paying for goods. In these types of transactions banks play an intermediary role as the various parties need certainty that the transactions will be completed on an arm’s length basis.

Blockchain takes out the necessity of having a third party intermediary as it allows the two parties to interact and deal directly with each other. This will make these transactions less administratively burdensome, much faster and cheaper. With the blockchain, you will be able to view all transactions and the cryptography used makes them accurate and valid.

Large banks are now racing against each other to be the first to make the blockchain work for their clients  – Standard Bank is testing the technology. Shipping companies are also designing blockchain technology and the venture capital market is awash with start-ups specialising in blockchain technology.

We often read of how behind Africa is in technology. But also think how parts of Africa have used technology to close this gap – the use of cell phones in East Africa to do online banking is an example. Embracing blockchain could help us to further “leap-frog” into becoming more globally competitive.

Think about whether there are any creative ways your business might be able to use it.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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It’s COIDA Time Again!

A4The Compensation for Occupational Injuries and Diseases Act (COIDA) is a statutory insurance policy for your employees and pays them compensation if they are killed, injured, disabled or contract an occupational disease or illness whilst at work.

Employers are required to submit an annual return which is due on 31 May this year.

The return can be done online and is relatively simple to do. Neither is it expensive.

Administration

There is quite a bit of administration to do if one of your workers is, say, injured. Make sure you have a designated person who can do this.

Employee definition is wide

 Temporary and casual workers are covered as are trainees.

Involve your staff

Your staff does not contribute to the fund but they stand to get benefits from it. Get them involved in helping make the workplace safer and less prone to disease. It will help foster team spirit and a sense of belonging in the organisation.

Finally, not complying with this Act means you cannot get a letter of good standing which means you will not be allowed to bid for tenders. Penalties can also be levied for non-compliance.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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