FINANCIAL RISK MANAGEMENT FOR YOUR SMALL BUSINESS: DO YOU KNOW HOW TO DO IT?

A3_BIs it really necessary to be able to manage financial risk? The answer is a definite “Yes!” It can make the difference between having a successful business or being forced to close down the business. Make sure you give your business the best chance to survive and thrive by understanding and implementing financial risk management.

Financial risk management can be broken down into the following steps:

  1. Understand what financial risk is

A financial risk is any event or circumstance that can have a potentially negative impact on the finances of a business.

  1. Identify financial risks applicable to the business

Identify all the financial risks that you can think of which can have an impact on the business. Consider using brainstorming with employees and/or a SWOT analysis to help you identify as many potential risks as possible.

An example of a financial risk is that customers who buy on credit from your business will not be able to pay their outstanding accounts.

  1. Assess each financial risk separately

Estimate as well as you can with the available information how probable it is that each risk can affect the business and what the possible amounts of the damage (negative impact) could be if the risk should realise.

Taking the example of customers who will not be able to pay their outstanding accounts, the following matrix is handy to assess the probability and extent of the damage should the risk realise. Assume that the probability and potential damage of clients not being able to pay their outstanding accounts are high as indicated on the matrix with “X”.

Probability of damage occurring (clients not able to pay accounts)
High Medium Low
Estimated extent of damage Major damage e.g. R100 000 X
Medium damage e.g. R30 000
Minor damage e.g. R5 000

 

  1. Treat risks to limit negative impact on business

Select and treat those risks you have the most control over to focus your financial risk management efforts on. Control in this context will be the ability to minimise the chances and potential damage caused if the risk should realise.

Create and implement an action plan to reduce each of the selected risks to acceptable levels.

Consider using insurance to protect the business against external risks which the business does not have much control over e.g. natural disasters.

To continue with the example: the matrix shows that it is highly probable that clients won’t be able to pay their accounts, and the amount of the resulting bad debts can be major. There are measures that the business can implement to prevent, or at least decrease, the likelihood and the amount of damage due to bad debts. These are the measures that the business should focus on implementing to reduce the risk of bad debts occurring to acceptable levels. Preventive measures could include checking the credit record of customers before selling on credit to them and implementing a pre-approved credit limit per customer.

  1. Monitor the financial risk management plan

Review the financial risk management plan regularly to ensure that it stays up to date with the changing circumstances of the business and remains effective to decrease current financial risks.

Using the above example of potential bad debts, the regular inspection of the debtors’ age analysis might show an increase in long outstanding amounts which can indicate that the credit policy for clients needs to be reviewed and updated.

Proper financial risk management can greatly increase a business’ chances of being successful and profitable. If you would like to implement a financial risk management plan or suspect that the financial risk management plan currently in use might be outdated, do contact your accountant for professional assistance.

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) 

Reference list:

USING A TRUST FOR ESTATE DUTY PURPOSES

A4_BTrusts are popular mechanisms through which individuals often structure their affairs to ensure efficient administration of their estates when they should one day die. One of the many advantages of using a trust is of course that it continues to ‘live on’ despite the fact that any one individual may have died. This in itself is a great benefit, especially when seen against the scenario where a person’s dependents are left in a state of financial limbo, and quite often financially distressed, but in anticipation of an estate being dealt with and divided in accordance with the law of succession by the appointed executor. This process can often take months, if not years.

Another factor rendering trusts so popular for estate planning purposes, is that it can also potentially be utilised as an effective estate duty planning tool. Bearing in mind that the first R3.5 million of one’s estate is exempt from estate duty (levied at 20%), an individual may be well advised to sell his/her estate to a trust when it is still relatively small.

For example, if Mr A has an estate of R1 million and he were to sell this on loan account to a trust of which his dependents and family members (and even he himself) are the beneficiaries, he will still own an asset of R1 million (being the loan claim) in his own hands in 20 years’ time when he dies. However, his erstwhile estate, consisting of property and share investments, are by now worth R5 million, albeit owned by the trust. Besides therefore that Mr A’s family is able to still access the investments through the trustees of the trust being mandated and obliged to care for their financial needs, Mr A has also saved on estate duty of R300,000 (being 20% of the amount in excess of R3.5 million).

The law of trusts is not open to abuse though, and it is important that appointed trustees of a trust act in the interests of the beneficiaries, as well as exhibit a degree of independence. Trustees who do not act independently and in the interest of the trust beneficiaries (and who are merely ‘puppets’ of an individual) will lead thereto that the trust in itself be disregarded and seen as a sham. The trust must therefore operate as a distinctly separate estate.

For estate planning purposes, as well as the proper administration of a trust (which can be fraught of potential pitfalls) it is best to seek the help of an advisor before embarking on any such exercise. One should further be mindful of the deliberations of the Davis Tax Committee, which is considering sweeping changes to the use of the trust instrument in specifically the estate duty context.

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) 

MANAGING TAX RESIDENCE OF COMPANIES

A1_BLarger corporate groups often expand their operations beyond South Africa’s borders. To facilitate operations in these other countries, it is often preferable for such groups to set up separate subsidiary companies in those jurisdictions. The assumption is then that these companies are by default and by virtue of their incorporation not resident here.  This is a dangerous assumption to make though and not necessarily the case if not managed properly.

Tax residence is not solely determined with reference to a company’s place of incorporation – it is but one of many criteria in terms of which a company may be regarded as being South African tax resident. The Income Tax Act contains a variety of criteria on which legal persons’ tax residence may be determined, and this includes that entity’s ‘place of effective management’.  In other words, despite the fact that a company may have been incorporated in another country: if that company is managed from South Africa, that company will be tax resident in South Africa in terms of the South African Income Tax Act.

The above will naturally very often give rise to dual residence for tax purposes.  For example, the country of incorporation will regard the company to be tax resident there by virtue of the company’s incorporation in that country, while South Africa will also regard the company to be a tax resident of it as a result of it being managed from here.  If South Africa does not have a double tax agreement with the other country in question, this will obviously lead to the company being subject to tax in both countries.

This is not preferable, and also discourages international trade.  It is for instances such as these that South Africa has concluded a great number of double tax agreements with many countries.  Double tax agreements determine (where a company is considered to be tax resident in both countries by virtue of their respective domestic legislative framework, for example where a company is incorporated in one country but managed from another), in which country and under which conditions a person will be considered to be tax resident.  For companies, in most of these cases the determining test would be where the company’s place of effective management is.

It would quite often be tax beneficial for a company not to be tax resident in South Africa and therefore it would be important to ensure that the company’s board meetings and day-to-day management take place in the country where tax residence is purported to be.  This should be managed carefully, especially where the company may potentially also be considered to be tax resident in a country with which South Africa has not concluded a double tax agreement.

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) 

THE PAIA MANUAL: HAVE YOU DONE YOURS?

A2_2_BIf your business is in the private sector and has not drawn up its PAIA manual yet, now is the time to start doing so as PAIA manuals for private bodies must be submitted to the South African Human Rights Commission (SAHRC) by 31 December 2015. Do you know who will be the Information Officer (it could be you!) and what information should be included in a PAIA manual? If not, read on to be enlightened.

Which person in an organisation is responsible for the PAIA manual?

The head of a private body is responsible for compiling and submitting the body’s PAIA manual to the SAHRC. In the case of a private company the CEO is the head of the company and normally the Information Officer responsible for the PAIA manual. An Information Officer can also be the person who performs the function equivalent to that of a CEO of a juristic person. The CEO or the person who performs the function equivalent to that of a CEO can also authorise any other person as the Information Officer.

What information should be included in a PAIA manual?

The information required to be included in a PAIA manual includes, but is not limited to, the following:

  •  The name and contact details of the head of the private body:
  •  Telephone number
  •  Fax number
  •  E-mail address
  •  Postal address
  •  Street address
  • A list of other legislation applicable to the organisation e.g. the Employment Equity Act 55 of 1998, the Income Tax Act 58 of 1962, etc;
  • Lists of records generated by the business in terms of other legislation applicable to the organisation, categorised per Act, for example, list the documents required to be kept by the organisation in terms of the Companies Act 61 of 1973 under a heading titled “Companies Act Records”. Some examples of documents to be listed in terms of the Companies Act are share registers, minutes of meetings of the Board of Directors, and the Memorandum and Articles of Association;
  • Which of the generated records is available automatically without being requested;
  • Which of the generated records is only available upon request;
  • Procedures to be followed and fees payable by a person requesting information; and
  • The procedures available to a person whose request for information has been refused.

The above information is merely a guideline and should not be seen as an exhaustive list.

It is important to keep in mind that different businesses will generate different types of records according to each business’ unique trading environment and information systems. There is no generic list of records applicable to all businesses. Care should thus be taken to include all of the relevant records in the PAIA manual.

How to submit a PAIA manual

No fees are payable when submitting a PAIA manual to the SAHRC.

After completion of the PAIA manual, the head of the organisation must initial each page of the manual and sign in full on the last page.

An original signed hard copy of the PAIA manual must be posted to the SAHRC’s PAIA unit. Signed PAIA manuals may be submitted via email, but an original signed hard copy must still be posted to the PAIA unit.

A note on requests for access to information in terms of the PAIA Act

Anyone and everyone cannot just request information from an organisation in terms of PAIA. A requestor must provide, amongst others, details like their identity, a postal address/fax number in South Africa, and the right which the requestor wants to exercise/protect with an explanation of how the requested information will assist in exercising/protecting that right. A private body has the right to refuse a request for information.

The drawing up of a PAIA manual can be of benefit to a business in more ways than one. While collecting the information to be included in the manual, shortcomings in certain systems or omitted reports which are required by law, for example, can be discovered. If not for the PAIA manual, the business would not have had the opportunity to discover and correct the shortcomings or omissions.

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) 

Reference List:

Documents published by the SAHRC on www.sahrc.org.za and accessed on 23 August 2015:

  •  Example of a manual for a private body
  •  Guidance notes: PAIA manuals
  •  Generic version of Section 51 manual for private bodies