A company making a profit but failing miserably
Recently
we gave a talk about accounting for small business.
We created a hypothetical income statement and balance sheet. Please download the sample income statement and balance sheet we used for our talk. It could be very informative for you and your business.
The income statement had about 20
accounts and a turnover of over R3 million which is not a bad turnover.
The expenses added up to R2.3 million. The net profit
was R717 000. By all means a great achievement. A business that made a
good profit. When we asked the group if they would like to get involved
in this business, most said "most definitely, when can we start?" They were attracted by
the turnover, the possibility of a big salary, teamwork, and of course a big profit.
However, looking closer at the income statement - The salaries
amounted to R1.2 Million made up of 2 accounts. A rather high value for a small business with a turnover of R3 Million.
Ask yourself - Do the directors really want to grow
the business or are they only taking as much as they can out of the business?
Now
the twist. We turned over the page to see their balance
sheet. This was a story in itself. They had about R 800 000 in
the bank and about R526 000 owing from debtors - (that meant they had
access to R1,3
million). They had a loan of over R1.3 million.They had creditors of
R545 000. They owed more money than what they were receiving.
This is unfortunately more of a reality then a sample. If the current
loan was called in, they would not be able to repay it and still
survive. A suggestion would be to turn the current liablity into a
non-current liability, eg. a bond and of course to manage their
finances better.
It
is important to analyse your income statement and balance sheet and
make informed decisions based on accurate accounts. In fact the single
biggest reason why
small businesses fail is because of lack of accounts and financial
guidance. You can
save your business by getting your accounts up to date. You can make
your business grow immensely by having accurate accounts and making the
correct decisions.
How Citadel sees investing
Warren Buffet, conceivably one of the greatest value investors
ever, describes in the preface of the book ‘The Intelligent Investor’
the key to successful investing as follows:
“To invest successfully over a lifetime does not require a
stratospheric IQ, unusual business insights, or inside information.
What’s needed is a sound intellectual framework for making decisions
and the ability to keep emotions from corroding that framework” .
Pillar one: Asset allocation drives performance
Numerous studies have shown that the majority of investment returns can
be attributed to the broad asset allocation decision, not to the
selection of individual fund managers or specific securities.
Pillar two: Effective diversification reduces risk without compromising returns
A portfolio that consists of a range of asset classes or sources of
returns that perform positively in different market circumstances, is a
robust portfolio that would preserve and grow wealth consistently in
real terms.
Pillar three: Value investing makes sense
Every asset class or investment has an economic value. This economic
value does not fluctuate greatly over time. However market perceptions
of the economic value of asset classes typically fluctuate strongly. In
the real world market prices therefore often diverge from economic
value. We base our investment decisions on the opportunities created by
such an under and overvaluation of asset classes.
Pillar four: The future is uncertain and will often surprise
We believe the future is always uncertain and impossible to predict
accurately. Often economic or other events will surprise investors and
throw investment strategies based on one future scenario into complete
disarray. However, if these uncertainties are built into the portfolio
construction process, such unforeseen events should not throw the
investment strategy off course and let emotions corrode the process.
These four pillars ensure that we make objective investment decisions
on your behalf and that we construct robust long-term wealth
preservation portfolios.
"Citadel is an experienced private investment company who have
been working with EconoAccounting for some time now. It is just as
important to keep your accounts up to date as it is to keep
your money safe and growing. Please visit www.citadel.co.za and contact Lee Irvine on
This email address is being protected from spam bots, you need Javascript enabled to view it
to make an appointment."
Case Study - Sekolo Sa Borokgo
by Hilary Levenstein - October 2006
"Sekolo SA Borokgo" is a school in Blairgowrie, Randburg that has
been using EconoAccounting very successfully since May 2006. It is a senior
school with about 300 learners. The principal, Dave Rossouw is
understandably proud of his school, with its 100% matric pass rate and
motivated learners. He is newly appointed - only arrived this year.
He
knows that the school must be managed
properly. When he took over he was unable to ascertain the
school's financial position. His bursar was unable to give him
management
accounts. Debtors were unacceptably high and incorrect.
Read more...
EconoAccounting Website
We have been very hard at work redeveloping our website (www.econoaccounting.co.za). The site has grown substantially over the last few years.
The new site has some useful features which makes it considerably easier for us to give you as much information as we can.
Currently the site has a growing knowledge base which will
have articles and comments that will help your business grow. Articles
will range from registering a company to easily handling Vat and Tax.
We will also have some experts available to assist you in
starting/growing your business. Our EconoAccounting support section has also grown and will continue to grow.
In the very near future we will have a user forum. You will be
able to chat to experienced specialists about many aspects relating to
business. You will also hear from other similar small businesses and read about problems they have and how they solve them.
That's it for the time being.
Regards
Hilary and the EconoAccounting Team
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