How to Improve Risk Management in Your Business

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Risk management has become increasingly popular in the past twenty years. It is also a corner stone of good governance.

Despite this increased focus, businesses are still being blindsided by events which result in high costs being incurred.

Potential problems and unpredictability – think “out of the box”

Usually a risk assessment is done via a matrix and once all known risks have been identified, they are ranked in terms of cost to the business should they occur.

That’s a limited way of doing this process as recent events have shown just how unpredictable the world is getting, for example a volcano in Iceland shutting down most flights into Europe.

Don’t just think of risks you know about but think of some potential event that could close down your business for an indefinite period. Even if you can’t envisage something specific that could shut you down, you can prepare for such an eventuality.

Optimistic versus pessimistic

Most of us are optimistic when we look into the future and thus we tend to be optimistic when doing a risk matrix. The business would be better served if a more pessimistic or a more even-handed, realistic approach was taken.

Consider operational risks also

Most risk assessments tend to happen at a high level, such as “is our sales strategy sound with risks catered for?” But do we think of what can go wrong operationally? The BP disaster in the 2010 Gulf of Mexico highlights this issue – a maintenance failure led to an explosion which killed 11 people, led to 3 million barrels of oil leaking into the sea and caused the BP share price to fall 50%.

Why not include risk mitigation in job descriptions of middle and lower middle management in your organisation with an emphasis placed on operational risk?

Risk is a dynamic process – keep thinking of what can go wrong and of how to minimise the chance of it happening.

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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Budget 2019: Credibility Restored?

A3“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs … but who does actually strive to do the deeds…” (Theodore Roosevelt 1910)

One of the shining lights of the country was the ability of Treasury to maintain fiscal discipline and not overburden the government with unmanageable debt. Since 2015, debt has risen quickly whilst tax revenues have slowed – debt to GDP (Gross Domestic Product) was 2.5% in 2015 but is now over 4% whilst tax collections will miss their 2018/19 target by R50 billion. Government debt to GDP was just over 40% in 2015 but is 56% now and is forecast to go above 60%.

All of these are alarming ratios but this was an unusual budget with the Eskom crisis the primary focus – the State-Owned Enterprise (SOE) only has sufficient funds to stay in business until April, has R420 billion in debt (R292 billion guaranteed by government) and cannot generate enough revenue to service this debt. The problem for government is that if Eskom collapses, then the economy basically stops – in the words of the President, Eskom is too big to fail. Yet its rescue is being closely watched by Moody’s – the only ratings agency not to rate South Africa’s debt as junk. Should Moody’s reduce us to junk status (and although they are scheduled to assess SA’s debt on 29 March they are expected to announce their decision after the May election) then off-shore institutions will be forced to sell R140 billion of government debt. This will have severe knock on effects, tipping our economy back into recession with a falling currency followed by interest rate hikes.

It is in this light that the Budget of Minister Mboweni should be judged.

In essence, the Budget is a holding operation in terms of tax changes as moves are made to deal with the Eskom crisis. The deficit to GDP will be 4.2% this year and will rise to 4.5% next year before declining in the out-years. Borrowing as a percentage of GDP will now breach 60% in 2024.

GDP will grow at 1.7% this year rising to 2.1% in three years. Inflation will rise from 4.7% now to 5.4% in 2022.

Government has taken R50 billion in cost cuts from the Medium Term three year budget – the main reduction is in government salaries with early retirement being offered to senior civil servants. Based on the assumption that 30,000 employees will take this up, the saving will be over R20 billion. The Minister emphasised that the government salary bill is unsustainable at 35% of government expenditure. Cuts were also made to overtime allowances, the government bonus scheme will be phased out and there is a salary freeze on senior SOE staff and cabinet and members of parliament.

Despite these savings the debt ceiling (a holy cow for Ratings Agencies) will be breached by R16 billion before coming back to within the ceiling.

Even before considering Eskom, these are sobering figures and the fact that the Minister laid them out starkly in an election year shows how the country cannot keep deferring the urgent issues it faces.

Eskom

The President had already announced the intended split up of Eskom into three units: generation, distribution and transmission. This would allow greater management focus on the discrete parts of Eskom. The Minister said that R23 billion will be set aside for each of the next three years to assist the SOE with its reorganisation into the three units and to help with its debt service costs.

Eskom will need to save R20 billion in costs per annum over this period. Although Minister Mboweni only gave a three year outlook, the restructuring of the SOE will clearly be a long term effort and government will need to be committed for as long as it takes.

In order for Eskom to access the R23 billion, it will need to get the approval of a Chief Restructuring Officer (CRO) who will be appointed by Ministers Pravin Gordhan and Tito Mboweni. The CRO will operate within restructuring requirements to be announced by the President in the next few weeks. The CRO will be the eyes and ears of the government.

Other SOEs will need to appoint a CRO if they wish to access government funds – R6 billion has been provided in the Contingency Reserve for this.

It is as if the recent loadshedding has brought a new urgency in tackling the sizeable problems that Eskom and other SOEs present. What is refreshing about the approach taken by Minister Mboweni is that he and the President are breaking the mould of government thinking – the fact that the Minister openly questioned the rationale for many of these SOEs and called for breaking away from old Soviet paradigms shows we are moving into a new era.

Will this be successful?

There are enormous risks ahead, not least of which is the Moody’s rating decision.  Moody’s are looking for a new credible approach to tackling Eskom and this is being laid out by the government. Trade Unions are already mobilising to fight the Budget and the reforms at Eskom. Perhaps the most encouraging aspect is that both Minister Tito Mboweni and President Ramaphosa seem up for the challenge.

If you strip Eskom out of the next three years, then there would be no breach of the debt ceiling and the debt to GDP ratio would not go above 60%. In fact the fiscal consolidation that Treasury has been desperately trying to instil since 2015 would be credible as the 2019 Budget would be in line with the projection of last year’s Budget.

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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Your Selection of Budget 2019 Tax Calculators

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“People who complain about taxes can be divided into two classes: men and women” (Anon)

  • How long will you work for the taxman today?

Input your salary into the 2019 Tax Clock calculator and find out how many hours you will spend today working for the taxman, and at what time precisely you will finally start working for yourself (warning – it’s not pretty!).

  • How will your income tax change?

Put your monthly taxable income into Fin24’s Budget 2019 Income Tax Calculator to find out.

  • How much extra will your sin taxes cost you this year?

Work out how much more you will be shelling out for spirits, wine, beer and cigarettes (or how much you will be saving if you don’t indulge!) with Fin24’s Budget 2019 Sin Tax Calculator.

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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What does Budget 2019 mean for you?

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The following proposed tax changes were announced

  • Income tax rates are left unchanged. The primary rebate was marginally increased but the overall effect of this is that individuals will pay R12.8 billion more in tax – the so called “bracket creep” which means you pay higher taxes as salary increases will put you into higher tax brackets.
  • “Sin” taxes have all been increased with beer, wine, spirits and cigarettes going up on 1 April (see tables below). Indirect taxes will bring R2.3 billion into the fiscus in the 2019/20 tax year.
  • The Sugar Tax will be increased to 2.21cents per gram up from 2.1 cents per gram.
  • The new Carbon Tax will come into effect on 1 June this year – originally intended for 1 January but only passed in Parliament in February. The tax will have a three year phase-in and is primarily intended to fulfil South Africa’s pledge to reduce carbon emissions by 50% by 2030. It will mean substantial administration in affected industries such as engineering.
  • A carbon levy will go into effect on 5 June and will be charged on the fuel price at 9 cents per litre.
  • Micro Business Turnover Tax. There is a marginal decrease in the Small Business Corporation Tax

The following taxes are unchanged

  • Dividend tax at 20%
  • Retirement savings contribution limit remains at 27.5% of income
  • Capital Gains Tax at 18% for individuals, 22.4% for companies and 36% for trusts
  • Company Tax at 28% and Trusts at 45%
  • Transfer Duties, Tyre Levies, Plastic Bag Levy, Incandescent Light Levy and other Environment Levies
  • All withholding taxes
  • The Interest Exemption on Income Tax – R23,800 if you are under 65 and over 65 R34,800
  • There is no change to the Medical Tax Credit as the country begins to phase in National Health Insurance.

Tables – Tax Changes Budget 2019 A1_insert1

 

 

 

 

 

 

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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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Budget 2019: Your Tips for Tito

how-to-budeget-and-squeeze-the-most-out-of-your-money-calculate-incomeOn 20th February the Minister of Finance, Tito Mboweni, will make his budget speech.

Traditionally, the Minister asks the public what they would like to see in the budget and this year Treasury has specifically asked South Africans to send tweets to @TreasuryRSA with the hashtag #TipsForMinFin and #RSABudget2019, or to use the Budget Tips form on the www.treasury.gov.za website.

Also keep an eye on the Minister’s own Twitter feed – for last year’s MTBPS (Medium Term Budget Policy Statement) he asked for contributions under a “Tips for Tito on Twitter” label; perhaps he’ll do the same for the Budget Speech.

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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Does “The Company” Still Have A Role To Play?

collaboration partnerships_1100733734_resizeConcepts the West has taken for granted are now being openly questioned, such as, is liberalism bad, is capitalism flawed, and does the company deliver what it set out to do?

These are valid questions and we should re-evaluate these concepts, particularly the role of the company.

What the company does

Over the past few centuries, Western ideas have globally been the most successful and have resulted in Western dominance. One of the key facets of this success has been the company.

It has proved a unique way of achieving great prosperity as:

  • Limited liability has seen companies prepared to take risks which has been the key driver in innovation (without innovation economies will stagnate).
  • Companies are organisationally efficient and have fostered good leaders, built up working skills and implemented good practices.
  • Through the market, companies are the most efficient allocators of resources and can raise large amounts of capital to achieve their objectives
  • Companies have thrived in the competitive environment of a market economy.

Examples abound such as Bill Gates setting up Microsoft to be highly effective in using existing technology to improve company operations.

So what’s the problem?

The first is a fall off in competition which leads to poor decision making and can stifle innovation. Facebook, for example, in a little over fifteen years has become monolithic and has now been shown to sell people’s private information.

Secondly, companies have become focussed on making money to the detriment of what they actually do – e.g. delivering a banking service. In the long term this leads to lower performance.

Thirdly, companies need to be continually vigilant in maintaining strong governance and ethical values. The current malaise in South Africa has seen many once-respected large businesses being ruined by assisting with state capture or allowing corrupt executives to enrich themselves at great cost to the company.

In a nutshell, we need to fix the company and make markets competitive again.

Time for renewal and experimentation

Today’s questions have happened in the past. At the turn of the twentieth century, many of the large conglomerates were broken into smaller more manageable pieces to bring competition back into these industries. This was highly successful.

In South Africa, the Competition Commission has been effective in curbing anti-competitive behaviour.

The King Commission has led to improved governance practices and has laid down a strong template for companies to follow.

Many new businesses have experimented with new approaches in organisational structure – at Spotify, for example, managers serve and report to their teams.

Companies have led the way in business for a long time and already we are seeing new shoots appearing as part of their renewal. This along with experimentation will almost certainly unleash a new wave of growth.

Catch that wave of growth! Look at your business and see how it can be made more effective.      

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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POPIA is Now Imminent: Don’t Underestimate the Work Involved

k-s19-ake-1534-lWith the release of final Regulations for the Protection of Personal Information Act (“POPIA”, often referred to as “POPI”), the Act’s commencement has become imminent.

Once this happens, business will have a twelve month grace period to prepare, but don’t leave it to the last minute.

Be warned there is a mountain of work ahead! Fines of up to R10 million can be levied for failure to comply with POPIA.

Watch this space! We’ll update you once POPIA’s commencement date is gazetted.

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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Directors: The Potential Liabilities You Face When Issuing Shares

WhatsApp-Image-2018-10-22-at-14.19.01In the life cycle of your company there will be times when you need to recapitalise the business.

When would you need to issue shares?

A basic requirement of the Companies Act (the Act) is that the company remain a “going concern” (have enough funding to remain in business for the next 12 months). To satisfy this requirement, directors must regularly perform liquidity and solvency tests (liquidity tests if there will be sufficient cash to meet all obligations whilst solvency tests if assets in the business exceed liabilities). If these tests indicate funding will be needed, one avenue open to the company is to issue more shares.

Alternatively a company may issue new shares when it plans a major expansion.

What is required of directors?

In terms of the Act, directors are responsible for issuing shares and must issue them for an “adequate consideration” which is to be calculated by the directors prior to the issuing of the shares.

This section of the Act requires that directors apply their minds to determining what an “adequate consideration” is.  In this process, directors need to keep the best interests of the company in mind, cannot have a conflict of interest and must show the necessary “care, skill and diligence” when performing this task.

This can be a demanding process as for example, the market may dictate that shares be issued below market value or an “inadequate consideration”. In this scenario, the company might for example have issued shares in the recent past and shareholders may only be prepared to take up new shares at a discount. Directors need to be able to justify the course of action they take i.e. that the value/consideration is actually adequate in the particular circumstances.

If you as a director fail in this task…

Directors can be held personally liable if they do not issue shares for an “adequate consideration” and may have to compensate stakeholders for any damages suffered in this process.

Thus while the Companies Act grants widespread powers, it also makes directors personally liable for losses sustained as a result of their actions. It is critical that you document your decisions so that you can withstand any scrutiny of them.

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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AI and the Changing Face of Jobs: Good News if We React Now

1_6PthHuOWvDLbhLj7kjzpNQ“Artificial Intelligence is a tool, not a threat” (Rodney Brooks, Roboticist)

There has been fear that the rise of Artificial Intelligence (AI) and robots will considerably reduce the work force. New research concludes that there will be winners and losers as AI becomes entrenched in economies, but there will be far more winners. The World Economic Forum (WEF) predicts that actually 58 million new jobs will be created – 75 million jobs lost but 133 million created (see the table below for more).

The trick facing business is how to get onto the winning side, as those businesses that will be most affected by AI, and those who quickly get it right, will have a substantial profit enhancer because AI will, in the medium term, drive down business costs.

Adapt and Thrive! What you need to do

  • The first issue is to acquire more resources in terms of technology (AI will need far greater processing power, new AI machinery), up-skilling your labour force and employing new staff (see table below).
  • Secondly, consider approaching other players in your industry to put together a plan that will bring in a future stream of skilled employees. This task is too big for one business to undertake.
  • You will also need to instil into your staff that they will need to continually improve their skills.

What type of employee will you require?   

Recruiters in the developed world are now focusing on people with problem solving skills – on an ongoing basis AI will throw up technical and competitive challenges. Staff need to be able to quickly solve these problems.

As technical people will become more of a value driver in business, having “soft” skills, like good communications and being effective in teams, will also be sought after.

Below is a table from the Word Economic Forum showing jobs that will be needed in 2022, and those that will face being replaced.

Landscape_LogistaA new era is starting and the news is fairly positive – AI should create more jobs, reduce business costs, and greatly enhance productivity. Don’t be caught on the wrong side of this revolution!

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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Be Aware Of the Changes to VAT on Electronic Services

A5The Minister of Finance warned in his 2017 Budget speech that VAT on electronic services would be widened. Treasury has now published regulations that come into effect on 1 April 2019.

The major changes

The definition of “Electronic Services” has been considerably broadened to include virtually all services. There are few exclusions namely:

  • Intra group transactions if the local company is a wholly-owned subsidiary of a foreign entity
  • Telecommunication services
  • Educational services provided by an entity regulated in a foreign country.

This means that B2B (Business to Business) transactions are included in the definition. This differs from other countries who exclude B2B and only tax B2C (Business to Consumers) transactions.

Electronic Services include cloud computing, advertising services, software subscriptions (such as anti-virus software), access to databases, the use of software provided by a foreign holding company (unless the above exclusion applies), broadcasting, and price reservation services.

Another point to consider is that intermediaries providing a platform for offshore entities are included in the Electronic Services definition. Thus a platform which invoices and collects payment on behalf of a foreign entity is included. This is sensible as it will be administratively simpler not to unnecessarily involve foreign businesses.

The threshold for businesses to register for VAT is R1 million in annual turnover from Electronic Services.

Take time to consider how this will affect your business. Better to get it right now than to have to negotiate penalties later with SARS.

It is worth speaking to your Accountant now if you could be impacted by this.

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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