So how do we start a business in SA? First pick the right business
entity form!
Four types of businesses activities:
• Extractive activities – these involve mining and agriculture which form a large sector of the South African economy. • Manufacturing activities – these involve the production of goods using raw materials. • Merchandising activities – these involve activities of wholesalers and retailers. • Service activities – this include a broad spectrum starting with government and administrative services right through to professional services such as those provided by banks, insurance companies, health care services, lawyers, and accountants. Sole proprietor
• Sole proprietor = most common form of business entity
• Anyone conducting any legal form of business activity may be established as a sole proprietor. • Income of the business is considered to be personal income of the owner and is added to whatever other taxable income may have been earned during any given tax year. • Advantages • it is easy and inexpensive to form; • there are few government regulations and reporting requirements • this form of ownership does not have to pay company or corporate income tax. • Disadvantages • the continued existence of the business depends on one person, the owner; • limited funds of one person = limited growth and inability to raise further finance • if business fails, owner’s liability is not limited Partnership
A partnership = 2 or more people in partnership
From an individual partner’s viewpoint it is identical in every
respect to a sole proprietorship, except that profits and losses are divided in an agreed proportion.
• Advantage • pooling of the resources that each individual partner may be able to contribute • Includes contributions such as financial resources, technical skill, and management expertise. • Disadvantage • Partners are jointly and severally liable for debts of the partnership, therefore each partner responsible for the actions of all other partners. Close corporation
A close corporation may be formed by between one and ten
persons who are referred to as members. Governed by the Close Corporations Act 69 of 1984 and Companies Act 71 of 2008
• The close corporation and the partnership have many similarities:
• each member has proportional interest in the business; • and owners are not distinguished from management.
• Differences from partnership:
• Unlike a partnership, however, the interest of a member may be sold without terminating the existence of the business. • A close corporation is taxed as an entity apart from the members. • the absence of the ‘jointly and severally liable’ provision which covers partnerships. Members of a close corporation enjoy limited liability unless they conduct themselves in a way which can be proved to be reckless or fraudulent Limited liability company
• Limited liability companies are broadly divided into two types
• private companies; and • public companies. Limited liability company
• The private company is a common form of business ownership
which has been in existence for many years • Governed by the Companies Act 71 of 2008 (as amended). • (Pty) Ltd • May have unlimited number of shareholders.
• The shareholders enjoy the benefit of limited liability insofar as
their exposure to loss is limited to their investment in the company. A private company is a legal and taxable person in its own right. Limited liability company
• The public company is the business entity on which many of the
examples in this course will focus. • Ltd • has all the characteristics of the private company except • its shares are freely transferable (normally via a securities exchange) Managed by a board of directors elected by the shareholders • executive directors (daily management of the affairs of the company) • non-executive directors (long-term strategic direction) THE ROLE OF THE FINANCIAL MANAGER
• The financial manager performs two primary roles:
• to pursue wealth-creating investment opportunities • to find funds to finance the investments.
• Some financial managers also feel that financial planning is also part of their role Investor opportunities
• Financial managers analyse investment opportunities within the context
the business • opportunities are evaluated by determining whether they are likely to increase shareholder wealth • valuate the possibilities and rank them in order of potential profitability • Distinguish between: • operating assets such as machinery and equipment designed to generate income • financial assets such as the shares of companies already operating Financing opportunities
• Once we have found a suitable opportunity, we need a source of financing!
• This decision (capital structure decision) is an area of considerable debate. • Seek money at lowest cost and apply such funds generate highest possible return.
• Finance is usually obtained in one of five ways:
• by going to the capital market and attracting long-term finance; • by going to the money market and using short-term finance; • by making use of suppliers’ credit; or • by retaining profits which could otherwise be paid to shareholders in the form of dividends. The capital market
• Capital market = market for securities, where companies and governments
can raise long-term funds. • It is a market in which money is lent for periods longer than a year. • The capital market includes the stock market and the bond market. • THE JOHANNESBURG STOCK EXCHANGE is a capital market
• The capital markets consist of the primary market and the secondary market • primary markets → new shares and bonds issues are sold to investors. • secondary markets → existing securities (or shares) are sold and bought from one investor to another The money market
• money market is the global financial market for short-term borrowing and lending • provides short-term liquidity funding for the global financial system
• Types of money market instruments:
• treasury bills (or T-bills): a short-dated government security, yielding no interest but issued at a discount on its redemption price • commercial paper: short-term unsecured promissory notes issued by companies • bankers’ acceptances: a promised future payment which is accepted and guaranteed by a bank, requiring the bank to pay the holder of the instrument a specified amount on a specified date Subsidiary functions of the financial manager
• ensure that the market price of the shares remain as high as
possible; • set and pursue targets for expansion and growth of the company; • reduce the risk of the company through appropriate diversification; • ensure that financial gearing is used effectively; • attract providers of loan capital and ensure that their investment is protected and that interest commitments are met on time; and • adopt a socially responsible attitude in financial decisions which will ensure the long-term future of the company THE INTERRELATIONSHIP OF FINANCIAL MANAGEMENT
• Links with Economics
Financial management does not take place in a vacuum – it occurs in the context of a specific national and international economy. Knowledge of the fundamental principles of economics, and some understanding of the interaction of economic forces, is therefore essential for the student of financial management. It will become apparent that the successful financial manager is aware of the impact of economic indicators such as the gross domestic product, the balance of payments, the foreign currency exchange rates, the inflation rate, and domestic interest rates.
• Links with Accounting
The International Financial Reporting Standards (IFRS) is applied to the financial statements of a public company to supply standardized company financial information to the public. This information, together with any other relevant information, is used by investors to place a value on the shares of the company. Accounting information has many limitations, particularly regarding its historic or ex post perspective. Moreover, accounting practices are designed to standardise reporting procedures rather than to reflect economic reality. THE INTERRELATIONSHIP OF FINANCIAL MANAGEMENT CONTINUED
• Links with Statistical Sciences
Many of the analyses performed by financial managers require knowledge of statistics and, in some instances, of operations research techniques. In the analyses of risk and return, for example, knowledge of descriptive statistics is required.
