Financial Literacy

Financial Literacy

Basic financial literacy means being able to manage your salary and expenses, save, invest, be responsible with regard to incurring debt, and be prepared for unanticipated or emergency expenses.[1]

This may be a daunting task for any South African in our current economic environment. However, it should not be something to avoid until it is too late. At Executive Underwriting Managers CC – (EUM) we are of the view that success starts with thinking successful. This can be broken down in more than one part.

For the purpose of our discussion we will focus on what is called “bottom-line thinking”.[2]

When you are aware of your bottom line, it becomes easier to know how you are doing in a given area in life and business. This also ties in with both your goals in life and business. Just note that you will only be able to achieve your goals if you and your organisation are aware of it. The goal should always be something that remains both obtainable and sustainable.

One of the key aspects which forms part of financial literacy is managing your debt. It is important to understand that debt itself is not necessarily bad, and can be a useful tool for building a sustainable and vibrant business. However, it must be managed carefully, as over indebtedness can put a business at risk.[3]

Essentially, one should manage three factors and have a hand on it at all times, asking the following:

  • What is the amount of debt?
  • What is the cost of this debt?
  • What income do I have available to service this debt?

Know the difference between capital expenditure and current expenditure. Capital expenditure is the money you spend on a new room for a new baby. Current expenditure is the money you spend on a trip to Mauritius to make the new baby. It is okay to borrow for capital expenditure. It is not okay to borrow for current expenditure.[4] 

There are a few instances where debt can be productive, but only if you are using the debt to purchase income generating assets.[5] Be aware of your risk in servicing debt and investments. Significant risks to consider are concentration risk – which means having too much of your capital exposed to one investment (too many eggs in one basket) and liquidity risk – which means the ability to sell an investment or realize cash quickly.[6]

Some financial blunders to avoid is overspending, excessive debt and short-term thinking.[7] Insurance is an investment. It is a way to protect your business from severe risks. However, your investing skills will not matter if you are constantly in debt, do not save enough money or cannot get your personal finances in order.[8]

Use debt to leverage business growth based on calculated risk. This is what accountants refer to as gearing. Financial gearing refers to the relative proportions of debt and equity that a company uses to support its operations. This information can be used to evaluate the risk of failure of a business. When there is a high proportion of debt to equity, a business is said to be highly geared.

Do your homework, seek professional advice and do cash flow projections to ensure that the benefits will outweigh the risk and the cost of the debt. So, in summary, borrowing is good if you can get a better return than the cost. It will leverage or gear-up your profits, but it will do the opposite if you get it wrong and it will make a bad situation worse.[9]

At EUM, we always encourage business owners to make the mind shift enabling them to advance to the next level. By complying with industry legislation and regulation, we create the opportunity for business owners to become more financial literate by completing the required Liquidity forms.

With consideration of the above discussion, this will immediately provide the business owner with a diagnosis of the current state of affairs in their business. We see this as a tool - to enable everyone required to complete the forms - to educate themselves towards a sustainable business. 

Remember that the result of a calculation is not the final objective. Calculations are performed in order to aid you in decision making. The answers derived from calculations are used to make better business decisions.[10]

Article by Adriaan Lombard

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[1] Alf James “Financial Literacy” 2018 Mail & Guardian.

[2] John C. Maxwell “How Successful People Think” 2009 Center Street.

[3] Andries Wiese “Maintaining sustainable debt levels”28 June 2019 Farmers Weekly.

[4] Dawie Roodt “Tax, Lies and Red Tape – Confessions of an unreconstructed neoliberal Fundamentalist”2013 Zebra Press.

[5] Warren Ingram “Become your own Financial Advisor-The real secret to becoming financially independent ”2013 Zebra Press.

[6] idem fn. 5 pg. 79.

[7] idem fn. 5 pg.171.

[8] Michel Pireu “Street Dogs” December 2015 Business Day Newspaper.

[9] David Zidel “Basic Business Calculations”2013 Penguin.

[10] idem fn. 9 pg. 75.

 

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