The current economic climate is placing businesses under severe pressure resulting in large numbers going out of business, filing for bankruptcy or turning to Business Rescue as a possible lifeline.

 

During 2012 the success rate for businesses that applied for Business Rescue was only 8 %. Initially unfavourable tax demands, stringent legal regulations, unviable business plans and the skills set of the appointed practitioners, all contributed to the low success rate of business rescue attempts. Statistics circulated by the Companies and Intellectual Property Commission (CIPC) during 2013 however reveals, the real rate of success of all businesses that have concluded their rescue operations is between 12 % - 15 %. During 2013, the number of appointments in the Western Cape alone was 15.8 % less than in 2012. This gives some credence to the interpretation that companies are benefiting from Chapter 6 of the Act, which came into effect in May 2011.

 

Could the reason for the high failure rate be the legal emphasis on Business Rescue?

Although Business Rescue is functionally non-judicial in nature, the current trend in South Africa places the decision of whether to file for Business Rescue in the hands of the Board of Directors and a trusted team of attorneys. Major decisions in the process are based on the business plan prepared by the directors and employees, often overlooking the inherent emotionally charged bias stemming from their desire to see the business succeed. A further reason for the failure of the rescue proceedings is the over-optimistic operational and financial projections which overstate the forecast cash flows and understate the funding requirements of the business. At a Turnaround Management Association of Southern Africa meeting during 2013, the questions were posed whether Business Rescue in South Africa is too legally focussed, and whether key financial considerations were overlooked in favour of legal consideration.

Among an individual’s most valuable assets is a healthy credit rating.

 

“Every effort should be made to gain and maintain such a rating, as it will stand you in good stead for all the transactions you undertake in the long-term future,” says Michelle Beetar, MD of information services company Experian SA.

South Africans will forever be admired worldwide for the manner in which the country transitioned from the old Apartheid error to the Democracy of the new Rainbow Nation. For a Constitution that is hailed worldwide as being progressive and for the National Credit Act (NCA) which enforced new ways of protecting South Africans while ensuring banking services were assessable to all.

Last year’s violent mine workers’ strikes in South Africa that led to at least 46 deaths and the shuttering of some mines, made headlines around the world. On the surface, it was about a wage dispute, but the major catalyst that drove the miners to such violence and desperation was the fact that many of them are buried in staggering amounts of debt after taking out unsecured loans.

10 out of 11 private airlines launched in South Africa have failed since 1991, a list which now includes 1time airlines. Many of these new ventures struggled when it came to support, financing and in particular, cash flow. The recent news of 1time airline’s decision to file for liquidation, after applying for business rescue in August 2012, also highlights the need for adequate research, planning and support when starting and running a new venture.

 

According to Gerrie van Biljon, Executive Director of Business Partners Limited, a specialist risk finance company for SMEs in South Africa, a common downfall for companies, from small enterprises to large entities, is poor cash flow management. “Cash flow management is a key challenge and companies need to manage their cash flow according to the sector they operate in by taking into account the challenges they could, and are likely to, experience.”

 

He adds that support and mentorship is another key area to business success, as it is vital companies are given guidance when deciding on certain business decisions, such as business rescue.

 

Van Biljon says that 1time’s situation is a common occurrence in the small and medium enterprise (SME) industry. “This situation is a key lesson to many South African businesses out there. It highlights that the old saying, “cash is king”, remains vital in any business as cash is the life blood of any business and without it, it is dead.”

 

1time was trading under the protection of a business rescue with an estimated R320 million in short-term debt and had been in negotiations with creditors since March 2012.

 

He says as with 1time, when businesses compete with large players they are often not on equal footing. “Large businesses have the buying power, the muscle and the means to act, which makes it very difficult for smaller businesses to own a fair share of the market.

 

“When businesses compete on an unequal base, as 1time did in the South African aviation industry, they are very prone to encounter issues, especially if the competition receives additional funding from external sources.”

Van Biljon explains that if the cost of a product or service is dependent on external factors which are difficult to control, it poses a major threat to a business. “In the case of 1time, the cost of fuel was a threat. If the correlation between what businesses may charge the customer and what the costs actually are is out of sync, the business model becomes vulnerable.”

 

Van Biljon says that even if an SME is offering excellent service and good prices, there is no guarantee that the business will thrive. “However, the SME will have particular competitive advantages over a corporate. Entrepreneurs have the ability to move quickly and adapt to changing environment, which large business find difficult to do. They are very innovative and act in an entrepreneurial manner, which means that they are always on a lookout for an opportunity that can lead to more business or even a new venture.

 

“In these very difficult trading conditions, entrepreneurs have no choice but to make the business work as there is just too much at stake. It is also a good time to revisit the business model, change tact and explore new markets,” concludes van Biljon.

The whole world is obsessed with the idea of growth. The perception is that if we don’t grow we somehow stagnate, we ‘rust’ or go backwards, becoming lesser peoples or nations. Given, however, that compound growth is not even possible over lengthy periods, why this absolute fixation on growth? Is growth truly the ‘be all and end all’, the panacea, to all the world’s woes?

Since many of the solutions proposed following the Global Financial Crisis (the ‘great recession’) are unlikely to be sustainable, “so much of what we simply take for granted will be challenged” says Glenn Silverman, Chief Investment Officer at Investment Solutions. As such, a far more balanced, or nuanced, understanding of growth is called for. Capitalism has proven to be the best economic system there is, but it too has its flaws. As such a more sustainable version of Capitalism is called for, one that focuses on sustainable growth, not growth at all costs.

Despite all the hype around repeated bouts of Quantative Easing along with ongoing European Central Bank initiatives, the ‘great recession’ and its aftermath is still with us.

“Millions who were retrenched remain unemployed, hundreds of smaller US and other banks have closed down. Zero Interest Rate Policies (‘ZIRP’) are in play in most of the West and Japan. Japan itself is now in its second decade of recession with no end in sight. Government and central bank balance sheets, in the West and Japan, are in a deplorable state, with financial repression now an increasing and disturbing reality” explains Silverman.

In the face of this, the governments of the day, supported by their cronies, the central bankers, continue to preach the message that if the world could only get (massive) growth going again - all will be well. Since, however, “it was massive unsustainable excess, especially with respect to debt, that created the conditions for the great recession, it’s hardly likely that this can also be the cure” adds Silverman. Or, put another way, if debt-driven growth was the cause of the problem, then more debt is unlikely to be the solution.

As such, in a world of deleveraging, achieving any (non-debt driven) growth, let alone strong, and sustainable growth, in the West or Japan, seems highly improbable. Far more likely outcomes in these regions would be;

• increased taxation (both in terms of percent, and spread),
• more regulation and increased government interference,
• financial repression in the form of capital controls, prescribed assets etc,
• increasingly creative accounting and brazen manipulation of rates and markets – already the hallmark of Western economic policy,
• an increasingly challenged welfare state, especially in Europe, where promises made by governments to electorates can no longer be afforded or met.

'Default' in some form or another is the likely outcome. “This may be of the official kind – which is the least likely, if you consider that Greece has apparently not defaulted over the past two years, or through inflation – as the debt numbers, and the associated central bank actions simply become too large” says Silverman.

Or, put another way, in a world of zero short-term interest rates (and promises by the likes of the US Federal Reserve to maintain these until 2015), with the ‘safe haven’ government bond yields already forced lower through Quantitative Easing and trading well below both current and future expected inflation levels, the whole fixed income market is (openly) manipulated, unattractive, and vulnerable.

In spite of this, today, markets appear as calm as a lake. Indeed, it appears as if the enormous firepower of the US Federal Reserve, the European Central Bank, the Bank of Japan and the Chinese have achieved their desired outcomes. But can this be sustained? Will the more recent cycle not simply be repeated – with yet more creative measures introduced following further sell-offs – but with sustainable growth remaining elusive.

Only time will tell what the unintended consequences of these enormous unconventional debt-driven measures will be. Many commentators talk of the return of inflation, the more bold, of hyper-inflation. Until then Silverman suggests “one keeps ones radar on and ones antennae alert to danger as, whilst the current positive momentum may continue for a while, the unsustainable fundamentals are likely to re-assert themselves.”

Until the world is set on a more sustainable path to growth, an environment of volatility, slow or no growth (in the West and Japan), and repeated debt-induced crises will likely characterise the world for years to come.

Let no one say they weren’t alerted!

While there has been a lot of focus on the difficulties faced by small and medium enterprises (SMEs) in South Africa in the current tough economic conditions, the low interest rate environment presents an ideal opportunity for small and medium enterprises to pay off existing debt that may be hampering growth.

 

According to Gerrie van Biljon, Executive Director at Business Partners, many SMEs are burdened with high levels of debt at the moment, which they have built up over many years. He says that the low interest rate environment that South African SMEs are currently operating in should provide an ideal opportunity for businesses to pay off the debt weighing them down. “Interest rates at this low level come as a relief to the already struggling business community. Although the recent cut in interest rates may be small, every bit of relief is welcome.”

 

Van Biljon says that in this environment, business owners that can afford to accelerate their debt repayments should definitely do so. “By paying an increased instalment business owners can reduce the payment term by a significant extent. Where possible, entrepreneurs should see this as a golden opportunity to get rid of debt sooner.”

 

He says that the increased cash flow available to business owners due to the interest rate cuts opens many doors for SMEs. “Additional cash flow relieves pressure and also gives SMEs the freedom to expand or reduce costs. The temptation to spend this additional cash flow should be resisted and rather be used to reinvest in the business or build up a nest egg, which most businesses are not usually able to do.”

 

Van Biljon says that entrepreneurs should capitalise on this favourable situation whilst it lasts. “While the interest rate trend is not clear, the possibility always remains that rates will increase over a period of time, which will have negative financial consequences for SMEs. Business owners should ensure that they use of this window period as best possible,” concludes van Biljon.

The downgrade of South Africa’s government bond rating by one notch to Baa1 from A3 by Moody’s Investors Service is premature, according to Melanie Brown, CEO at Global Credit Ratings (GCR).
Brown says a key input into any decision about South Africa’s credit rating must be the conference in December. “While we disagree with the move by Moody’s, it does not come as a complete surprise. Of the three international rating agencies, Moody’s rating was a notch higher.”

This latest move means that Moody’s, Standard & Poor’s and Fitch all currently have a credit rating of BBB+ on South Africa with a negative rating outlook, meaning the next move would be a downgrade to BBB.

Brown notes that an economy such as South Africa, which remains reliant on transformation and development, needs to provide investors with regulatory certainty and administrative efficiency. “This in turn requires laws and policies that are clear, definite and consistently applied by the current administration and its successor, with any policy changes a result of the shifting economic landscape, so as to maintain stable debt ratios.”

She says continuing strikes and wage demands are having a hugely detrimental effect on South Africa’s image around the world. “Perhaps more importantly, they come at an already difficult time when international ratings agencies had already expressed their concern about populist pressure and uncertainty around policy direction, which could undermine commitment to low budget deficits and debt targets.’’

“Whilst some market movement and rand weakness is expected, I don’t believe it will be significant because the move aligns Moody’s rating with the other two, so it’s largely driven by sentiment at this stage. However, if the rating moves from BBB+ the impact will be far more significant,” she says.

In its report, Moody’s said the current fractious domestic environment is not conducive to reforms being implemented. In addition, while government is working towards a stabilisation of the debt-to-GDP ratio through increased spending discipline, the agency noted that these plans were rendered more challenging given recent events.

 

Click here to read the official Moody's report.

National Savings Month is being turned into ‘a bad joke’ by a deluge of marketing material touting easy finance and quickie personal loans that many consumers will struggle to repay.

It seems that the Savings Month of July is just another month of easy pickings for peddlers of fast and easy credit.

The bad joke is that some institutions that give lip-service to the objectives of National Savings Month also contribute to the flood of marketing material that induces hapless individuals to saddle themselves with debt.

Compare the noble sentiments about the need to save with the personal loan advertising of these banks. It’s a sickening reality-check.

National Savings Month, she says, is an ideal opportunity to start a debate on the mismatch between what some banks preach and what they practise.

Personal loan advertising showed only how easy it was to take a loan without mentioning how difficult it can be to pay off debt.

The advertising creates the impression that debt is a fast, easy and painless proposition. This can be misleading as it is not nearly so easy to get out of debt.

For many, easy loans can lead to years of anguish and humiliation.

The National Credit Act (NCA) outlaws advertising from credit providers that is misleading, fraudulent or deceptive.

I have yet to see an advertiser prosecuted under this section of the NCA. Even if it is held that slick, persuasive advertising doesn’t breach the letter of the law it certainly offends the spirit.

It’s time to put the spotlight on these advertising practices to alert both the public and the authorities.

She says some ads foster a live-now-pay-later attitude by inviting consumers to enjoy the lifestyle they want right now. Ads typically offer easy loans online or over the phone. Even those on a credit blacklist are invited to take loans topping R100 000.

Taking an easy loan, then a loan to pay the first, then another leads to a form of enslavement, while the advertising offers to “help” the consumer.

The reality is that the debts pile up along with despair. The effects might be depression, physical illness, the break up of marriages, the loss of homes and in extreme cases suicide.

Knowingly or unknowingly, banks touting easy credit to often unsophisticated consumers were trading on the trust placed in these institutions.

These are the pillars of the economy. Consumers believe they would never induce them to do anything reckless, anything that might endanger the consumer’s own financial wellbeing.

Many debtors say to me ‘I thought if my bank thinks I can afford it and it’s the right thing to do, it must be OK’. Trust built up over decades is being eroded. The immediate impact is felt by overstretched consumers who feel betrayed. The long-term effect will be felt by banks who will struggle to recover their former standing.

In today’s uncertain economic environment, planning for your financial future has never been more important. As the cost of living increases, so too does the amount of money required to secure a comfortable retirement.

Whilst it’s undoubtedly important to start making provisions for your retirement as early as possible, investing your money is likely to prove significantly less effective if you haven’t cleared your debts first.

Defining debt

Debt comes in numerous forms, and it’s important that you understand and assess the nature of your debts, and what expenses you are able to carry, before deciding on a feasible investment strategy.

Debt becomes significantly less manageable once your income has been reduced to a fixed level, and high-interest debt, such as that incurred via credit cards and retail store accounts, can end up severely compromising your golden years.

Some debt on the other hand, can in fact be considered good. Residential properties tend to appreciate in value, thus mitigating the impact of the interest you’re paying on your bond repayments.  Similarly, student loans generally offer low interest rates, and the interest paid is often tax deductible, meaning that you aren’t simply surrendering a portion of your monthly income to unnecessary interest accrual.

Prioritising your debt

Ridding yourself of all debt isn’t always a feasible solution. As such, it’s important to prioritise the various amounts you have owing before deciding on an appropriate debt reduction strategy.

Bonds are usually the most manageable form of debt, and can in some instances be used to help pay off amounts accruing higher levels of interest. Should you have equity available in your bond, it could pay off down the line to settle your more expensive debt by drawing on these funds.

It’s likely that your credit cards and retail store accounts will be those incurring the highest levels of interest, and these should be dealt with first. These accounts can incur anywhere between 12 and 25% in interest, and should you still owe money on these, it’s very unlikely that you’ll be making any profit from an investment.

Investment portfolios, even those dealing with higher risk classes like stocks, are unlikely to offer you a return of more than 10%, while high-interest savings accounts yield even less.

Should you owe R10 000 on your credit card at an interest rate of 15%, you’d be far better advised to pay that off and save yourself R1 500 in repayments, rather than invest the same amount in a high-interest savings account that is unlikely to yield more than R200 over the course of the year.

Debt repayments are an investment

Remember that, by paying off your debt, you are essentially laying the foundations of a solid investment strategy. By putting money towards your debt repayments, you are effectively freeing up funds that can later be used to create a more sustainable investment portfolio.

And whilst other investments could ultimately cause you to lose money in the long run, an investment in debt repayment is risk-free, and offers the benefit of being unaffected by market conditions and fluctuations.

Don’t deplete reserves

Whilst it’s important to try to reduce your debt as quickly as possible, don’t make the mistake of over-exerting your finances in order to expedite the process. By putting all your disposable income into your debt repayments, you leave yourself vulnerable to any unforeseen expenses that may occur.

In such an event, you’re likely to once again use a credit card to finance payment, effectively replacing old debt with new. So make sure to maintain some sort of emergency fund, allowing yourself a degree of financial flexibility as you work towards clearing your debt.

Spend now, save later

Ultimately, the quicker you are able to pay off your debt, the sooner you’ll be able to start truly saving for a secure retirement. Whilst it may involve more upfront expenses in the short-term, it can pave the way for a truly effective investment strategy, which, if given suitable time to yield returns, will leave you poised to enjoy your retirement years free of financial burden.