Businesses: How to Survive the Coronavirus Panic

Globally, the COVID-19 coronavirus has spread panic amongst societies and markets. Businesses are suffering their most challenging times since the 2008 Global Financial Crisis.

This is the time for urgently reviewing how events have affected your business and how you can respond to the seeming chaos.


Cash is king 

When faced with great uncertainty, conserve cash and shore up all your credit lines. This will give you greater flexibility when strategizing a response to the coronavirus. You may, for example, be able to buy a crucial stock item for a discount from one of your suppliers, thus ensuring that you can continue operating. Apart from strengthening your position with your competitors, this could help the supplier to remain in business – relationships are important, and this supplier will be grateful to you.

Trim costs wherever you can – some of this is being done for you as many companies are cancelling travel, resulting in many meetings and conferences being called off. Capital expenditure is being pruned globally and there may be opportunities to delay some of your current capex.

Keep your staff healthy 

Apple has already told staff to work from home to reduce the risk of catching or spreading the coronavirus. Desks are being spaced to reduce the possibility of catching the virus and meetings are being cancelled or are taking place electronically.

Make sure the risk of staff catching the virus is minimised and have a succession plan if some key members are incapacitated by the coronavirus. Take particular care of staff members who have health issues, as they could become seriously ill or die if they catch the virus. As health authorities are advising people to frequently wash their hands, ensure that you have enough hand washing dispensers. 

As many of your staff will be working from home using smart phones and their own desktops, have your IT department mitigate the risks of hacking or computer viruses getting into your IT platform.

Perhaps, most importantly, communicate often with your employees and managers. Regularly follow updates from the World Health Organisation and the local Department of Health. This is a time of uncertainty, as there is no definitive knowledge on how the coronavirus will evolve and thus sharing the information you gather on the disease, will improve the health and morale of staff in your business.

The Occupational Health and Safety Act imposes obligations on employers to provide a healthy environment for their staff. Much of the above is in line with ensuring that you comply with that Act’s requirements, but you need to ensure your organisation is compliant with the legislation. 


Your supply chain

This is clearly a key area and working out the risks of suppliers and contractors being unable to supply you is a key task. Some of the important areas will be changing your safety stock holdings, reviewing your contracts with stakeholders and assessing the risks and the consequences of default. This is where it really pays to have cash.

As we said above, keep in mind the long term relationships with suppliers.

You also need to review your insurance policies – will they pay out if certain scenarios unfold? Do you need to take out different policies?

Reacting, planning and preparing strategies will ensure you have the agility to ride out this crisis and may even strengthen your position with competitors.

Disclaimer

The information provided herein should not be used or relied on 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 professional adviser for specific and detailed advice.


5 Reasons To Never Overlook Your Business Plan

When setting out on a new venture or adding a new section to your business, it pays to have a strategy as to what you want to achieve and how you want to go about accomplishing your vision.

Be thorough when doing this and do a comprehensive business plan.

Why a business plan is important

  1. Starting a business or changing your operation invariably requires funding from either a bank, investors or both. Unless they can see a clear-cut plan of action, an in-depth knowledge of the marketplace and what you plan to achieve, it is unlikely you will be able to get any money for your business.

  2. Doing a business plan is a substantial commitment as it involves research plus giving every section of the proposed venture deep thought. Your efforts will be rewarded as your new venture will be a much smoother process if you have done a business plan. By considering all the risks and pitfalls in your plan, you will avoid making some costly and potentially ruinous mistakes. In the long term your business will be more profitable and sustainable.

  3. A good business plan will enable you to focus on the important areas of the company, something you will be grateful for as many issues will arise as the business unfolds and having  good knowledge of the sector you are in will more easily allow you to realise which of these issues is important and requires your attention.

  4. Having a good roadmap of the business will also let you effectively measure the progress you are making – measurements of how a company is performing are important and a business plan will give you a baseline to rate how you are doing. 

  5. A good business plan will greatly increase the chances of your new venture being successful. On an ongoing basis, you can update this plan to continually assess how the company is performing.

Businesses: Think Strategically When Cost Cutting

We all know times are tough and many companies are embarking on cost cutting exercises. Unfortunately, this is a necessary procedure but think of the impact on staff morale and the potential loss of productivity when undertaking cost reduction. You don’t want to end up leaving your business worse off.

A few tips

  1. Communicate effectively. Cost cutting is not a pleasant experience, so be open with staff – why it is necessary, how much you plan to save and how this exercise will make the business more sustainable.

  2. Be fair. If you plan to stop business class travel for some employees but keep it for senior executives think of the possibility of staff resentment and the potential for an “us versus them” situation to develop.

  3. Keep perspective. A company recently stopped funding junior staff’s cell phones. Not only did this cause widespread anger but the actual saving was too small to have a real impact on reducing expenses.

  4. Think it through holistically. In another example a business made significant cuts to travel expenses and used video conferencing for team members to communicate with each other. This reduced team ethos, effectiveness and productivity was lost.

  5. Think of the side effects. In another travel cost cutting scheme, staff were not allowed to use taxis. This, in effect, stopped travel after hours as staff then opted to travel during business hours. Thus, the company lost up to two working days a week when staff undertook business trips.

  6. Don’t skimp on contractors – such as not letting them use your canteen. They do important work for your company, so don’t put this at risk by treating them badly.

Use common sense as your guide when you undertake cost cutting.  

Deemed Accruals Can Seriously Disrupt Your Cash Flow – A Tax Lesson for Property Developers

A recent Supreme Court of Appeal (SCA) judgment has confirmed a view that our courts have held for a long time – namely that when a property developer enters into an agreement with a buyer to transfer the property, even if the developer only actually gets paid in a subsequent tax year, the income is deemed to have accrued to the developer at that date. The developer must therefore include the full proceeds of the sale in its income tax return for the year the agreement was signed.

This has the effect of the property developer paying tax before receiving the proceeds of the sale, putting the developer out of pocket until transfer to the purchaser takes place.

A R1.9m tax assessment challenged

A property developer in Cape Town entered into sales agreements for 25 units. Each agreement called for a deposit of R5,000 with the balance to be paid on completion of the development. Purchasers could take possession once the full sale price had been secured or within 60 days of the sale. By the end of the first year 18 purchasers had taken possession and in all 25 cases the purchase price had been fully secured.

Transfer of the properties took place in the next tax year. The developer did not include the sale proceeds in his tax return for the year of concluding the agreements but showed the proceeds in the next tax year. The Court upheld the decision by SARS to tax the developer in full in the first tax year. The assessment at just under R1.9m was based on taxable income of R6.8m.

Why the developer lost

Property developers assume a substantial risk when they undertake a development – they spend millions of Rand upfront and if they can’t sell the developed properties they make a considerable loss. They mitigate this risk by selling the properties upfront – usually before they commit to building. Clearly they will not get paid until the property is transferred, so they accept a deposit plus a guarantee (usually from the purchaser’s banker) for the balance of the selling price, or alternatively the buyer placing the funds in the conveyancer’s trust account. Once the developer is assured of selling the properties it then proceeds with the development. On this basis, banks will advance the cost of the development to the developer. However, in terms of the law the proceeds of the sale of the properties are deemed to have accrued to the developer and are taxed in the year the agreement is signed. This principle has been upheld by our courts for generations and developers need to be aware of the cash flow implications. © DotNews. All Rights Reserved.

Property developers assume a substantial risk when they undertake a development – they spend millions of Rand upfront and if they can’t sell the developed properties they make a considerable loss. They mitigate this risk by selling the properties upfront – usually before they commit to building. Clearly they will not get paid until the property is transferred, so they accept a deposit plus a guarantee (usually from the purchaser’s banker) for the balance of the selling price, or alternatively the buyer placing the funds in the conveyancer’s trust account. Once the developer is assured of selling the properties it then proceeds with the development. On this basis, banks will advance the cost of the development to the developer. However, in terms of the law the proceeds of the sale of the properties are deemed to have accrued to the developer and are taxed in the year the agreement is signed. This principle has been upheld by our courts for generations and developers need to be aware of the cash flow implications. © DotNews. All Rights Reserved.

Interest Rates in 2019 – Which Way Will They Go and Why?

“Prediction is very difficult, especially if it is about the future” (Nils Bohr – Nobel Laureate)

Normally the market and economic commentators react favourably to interest rate decisions of the Monetary Policy Committee (MPC). The Reserve Bank, which houses the MPC, is one of the most admired institutions in the country. The MPC’s decision to raise interest rates in November however drew a sharp reaction, and polarised opinion into two camps, both with strong arguments – What can the recent rate increase tell us?

Firstly, what those against the increase said… The economy was either in recession or close to it when the decision was announced. This is contrary to mainstream economic thought as raising interest rates tend to slow down economic growth.

Secondly, inflation at 5.1% is well within the 3-6% band that the MPC targets. If you look at Shoprite, our largest grocery chain, more than 11,500 items in their stores are trading at lower prices than this time last year. Aligned to this is that the fuel price decreased by more than R1.80 per litre in December. The petrol price spreads its tentacles widely throughout the economy and this decrease will reduce cost pressures.

Consumer confidence has been dropping in recent months and a rise in borrowing rates will not help this. Finally, the currency has shown strong gains over the past few months and thus the Rand needs no bolstering from an increase in interest rates. Secondly, what those for the increase said… It helps those with high savings as they will receive more monthly income.

One key uncertainty is the oil price. It has fallen 30% but this can just as quickly reverse. It was unknown to the general public at the time (although the MPC would probably have known about it) but the Purchase Price Index, which measures cost increases within business, jumped to 6.9%. This indicates that industry is experiencing cost pressures which will over the next few months find their way to the consumer. The international outlook is volatile with President Trump attacking Chinese trade policies. This volatility often negatively affects developing nations (like ours) as investors tend to move their funds into secure investments such as US Treasury Bonds. Thus, increasing interest rates will help shore up the Rand. In turn, making the Rand more stable will send a positive signal to Rating Agencies which can help stave off further downgrades. This also can help to encourage investment which is crucial to future economic growth. If one looks at these two viewpoints, the risks pretty well balance each other out. Clearly, the MPC was cautious with this call and time will tell which side was correct. So which way will interest rates move in 2019 and beyond? Where are local and global interest rates going? The consensus has been that the USA will continue to gradually increase rates as its economy has been surging. However, recent comment from the Federal Reserve Board indicates they will pause upping interest rates in 2019. Presently our Monetary Policy Committee have planned to raise rates from 6.5% at present to 7.7% in 2019, but these may be put on hold if the USA keeps rates constant. Just bear in mind also that it is notoriously difficult for even the best economists to predict future economic conditions with any degree of certainty, so perhaps the best advice is to be prepared for both scenarios. © DotNews. All Rights Reserved

One key uncertainty is the oil price. It has fallen 30% but this can just as quickly reverse. It was unknown to the general public at the time (although the MPC would probably have known about it) but the Purchase Price Index, which measures cost increases within business, jumped to 6.9%. This indicates that industry is experiencing cost pressures which will over the next few months find their way to the consumer. The international outlook is volatile with President Trump attacking Chinese trade policies. This volatility often negatively affects developing nations (like ours) as investors tend to move their funds into secure investments such as US Treasury Bonds. Thus, increasing interest rates will help shore up the Rand. In turn, making the Rand more stable will send a positive signal to Rating Agencies which can help stave off further downgrades. This also can help to encourage investment which is crucial to future economic growth. If one looks at these two viewpoints, the risks pretty well balance each other out.

Clearly, the MPC was cautious with this call and time will tell which side was correct. So which way will interest rates move in 2019 and beyond? Where are local and global interest rates going? The consensus has been that the USA will continue to gradually increase rates as its economy has been surging. However, recent comment from the Federal Reserve Board indicates they will pause upping interest rates in 2019. Presently our Monetary Policy Committee have planned to raise rates from 6.5% at present to 7.7% in 2019, but these may be put on hold if the USA keeps rates constant. Just bear in mind also that it is notoriously difficult for even the best economists to predict future economic conditions with any degree of certainty, so perhaps the best advice is to be prepared for both scenarios.

© DotNews. All Rights Reserved.