national certificate: banking

NATIONAL CERTIFICATE:BANKINGNQF Level 5SAQA ID: 61589

BankSETA Learning Programme 20186

Training manual:

UNIT STANDARD 7345

Determine the banking-related financial needs of a business

Banking 5 (US 7345) V1 CHARTALL BUSINESS COLLEGE (PTY) LTD ©1

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CHARTALL BUSINESS COLLEGE (PTY) LTD ©Banking 5 (US 7345) V1 2

CONTENTS

CRITICAL CROSS-FIELD OUTCOMES (CCFOS) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1.1 . BUSINESS PLAN (AND LEGALITY) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1.2 . DETERMINE THE NATURE OF THE BUSINESS . . . . . . . . . . . . . . . . . . . . . . . 8

1.3 . IDENTIFY POTENTIAL BUSINESS OPPORTUNITIES . . . . . . . . . . . . . . . . . . . .10

1.4 . THE FOLLOWING SECTION COVERS VARIOUS TOPICS AND FOR

EASE OF REFERENCE SEE BREAKDOWN BELOW: . . . . . . . . . . . . . . . . . . . . . . . .11

1.5 . RECORDING THE CURRENT COMPANY PROFILE . . . . . . . . . . . . . . . . . . . . .15

1.6 . VISIT THE SITE AND PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

1.7 . COLLECTION OF VARIOUS INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . .17

1.8 . COMPARISON OF FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

1.9 . ANALYSIS OF BUDGETED AND FORECASTED DATA ACCORDING

TO INDUSTRY PREDICTIONS` . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

1.10 NATURE AND RANGE OF CLIENT’S NEEDS AND DESIRABILITY

OF BANK INVOLVEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

1.11 CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

1.12 GLOSSARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

1.13 REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32


Dear studentWelcome to this training programme. You are going to learn all how to determine the banking related financial needs of clients (individuals and businesses) and how to provide products and services to meet these needs.

This section briefly outlines the structure of the programme and details what you can expect as you embark on this journey of learning and assessment.

This qualification is a nationally registered certificate. Its registered name is NATIONAL CERTIFICATE: BANKING and it has the unique qualification identity number 61589. More information can be found by going to the website of the South African Qualifications Authority (SAQA) on www.saqa.org.za. Much of the information that follows is extracted from this SAQA document for your convenience and information.

During this programme you will get to know Bianca.

She works in a bank near Sandton, Johannesburg and has been a customer consultant for two years. Bianca is ambitious and would like to be a private banker – she is taking every opportunity to learn new knowledge and skills, but sometimes things go wrong. Bianca will share her experiences with you so that you can learn from her mistakes and her successes.

Whenever you see Bianca you will know that she is sharing her views with you.

Introducing Bianca


Be on the lookout for these icons that you will see in this training material.

Learning outcomes

Take Note

Group Activity

Video

Test yourself questions

Formative Assessment

Individual Activity

AdditionalReading


At the end of each skills programme is a section entitled Critical Cross Field Outcomes or CCFOs. (Note, they are not CCFO’s – there is no apostrophe. This is because CCFOs is plural, as in many CCFOs. If we wrote CCFO’s we would be saying that the CCFOs possessed something as in “The CCFO’s cat”, or whatever the CCFOs possessed! Take care to use apostrophes correctly in order to appear more professional.)

CCFOs are basically life skills. They are qualities that should be developed throughout the qualification by each learner. The South African Qualifications Authority (SAQA) defines CCFOs as “those generic outcomes that inform all teaching and learning” (SAQA, 2016).

Be culturally and aesthetically sensitive across a range of social contexts: give feedback on assessments in a culturally sensitive manner. SAQA also identified five developmental outcomes which were defined as follows: In order to contribute to the full personal development of each learner and the social and economic development of the society at large, it must be the intention underlying any programme of learning to make an individual aware of the importance of:

1. Reflecting on and exploring a variety of strategies to learn more effectively;

2. Participating as responsible citizens in the life of local, national, and global communities;

3. Being culturally and aesthetically sensitive across a range of social contexts;

4. Exploring education and career opportunities; and

5. Developing entrepreneurial opportunities.

These CCFOs are generic, but the way they are applied in each qualification is highly context- and discipline-dependent. To develop these CCFOs we have integrated them into each skills programme to show how they may be applied in the workplace (NQF, n.d.).

These are the critical outcomes adopted by SAQA (2015):

• Identify and solve problems in which responses demonstrate that responsible decisions using critical and creative thinking have been made.

• Work effectively with others as a member of a team.

• Organise and manage him/herself and his/her activities responsibly and effectively.

• Collect, analyse, organise and critically evaluate performance.

• Communicate effectively using mathematical and language skills.

• Demonstrate an understanding of the world as a set of related systems by recognising that problem-solving contexts do not exist in isolation.

• Benefit by full personal development, thus contributing to the social and economic development of South African society at large.

Unit standard CCFO contributing

CRITICAL CROSS-FIELD OUTCOMES (CCFOS)


REFERENCESNQF (n.d.). Developmental outcomes (FAQs). Available from: http://www.nqf.org.za/download_files/nqf-support/Learning%20Programmes_FAQ_Question_4.pdf [Accessed 5 May 2016].

SAQA. (2015). National Certificate: Banking (61589). Available from: http://regqs.saqa.org.za/viewQualification.php?id=61589 [Accessed 5 May 2016].

SAQA. (2016). Glossary of terms. Available from: http://www.saqa.org.za/docs/webcontent/2014/web0225.html [Accessed 5 May 2016].


DETERMINE THE BANKING-RELATED FINANCIAL NEEDS OF A BUSINESSSE

CTIO

N 1

Learning outcomes

• Establish the nature of the business.

• Establish the nature of the client’s needs.

• Research the business context of the client.

Unit Standard 7345


DETERMINE THE BANKING-RELATED FINANCIAL NEEDS OF A BUSINESS1SECTION

Introduction

1.1 Business plan (and legality)

1.2 Determine the nature of the business

This section covers the financial needs of a business., business financial practices as well as financial implications for making decisions.

(US 7345 SO1 AC1)

To help the client obtain (and continue obtaining) products and services from a bank, the client provides a business plan. This is a formal statement of business goals and how these are going to be achieved.

When determining the nature of the business it is important to take the following into consideration:• Financial stability of the business: the business must be able to

cover the day-to-day expenses and having a sense of security that there will be enough funds to proceed with this.

• Value of relationship:

Customer lifetime value is a key metric in the finance sector. Every bank wants to build more profitable relationships which means they must (CLV-Calculator.com, 2016):

° Retain the loyalty of the customer (increase customer lifetime in years); and

° Increase the value/profitability of the customer through up selling and migration to higher value products.

Bank policies and proceduresEach bank has its own policies and procedures to determine, assess, and approve the banking-related financial needs of a client business. This section provides you with generic tools and techniques, however, learners should be mindful of the systems and processes required by their banks.

The template for a business plan is available from the bank’s website and provide sufficient information for the prospective customer to be able to complete and submit it. It is typically structured to include:• Business Description (e.g. legal entity, sector, address and premises)

• Industry (e.g. 5 year history of industry such as growth or decline, prospects and problems)

• Product Definition (e.g. product mix, competitive advantage)

• Market Definition (e.g. target market and growth patterns)

• Marketing Strategy (e.g. description)

• Competition (e.g. competitors, their success and weaknesses)

• Operations & Management (e.g. industry changes, key players, staff component of business)

• Financial Components (e.g. projection of cash flow – 36 months or audited financial statements)

While the business plan should provide a comprehensive source of information, the bank also carries out its own independent analyses.



The customer lifetime value (CLV) calculator for banking requires certain inputs (CLV-Calculator.com, 2016):

° Average balances of loans and savings on a per customer basis;

° Average interest rate margin (as a percentage);

° Average income/revenue per customer generated from non-interest income sources (e.g., fees, commissions, and other sales); and

° Costs of providing customer services and access (e.g., transaction costs, statement costs, and potentially a provision for infrastructure costs, etc.).

The inputs are used to determine the average annual profit on a per customer basis. This information is then combined with customer retention rates, other costs of retention and up-selling, as well as initial customer acquisition costs that ultimately provide the CLV for the bank.• Legality: this can refer to the different forms of business

organisation.

The Companies Act of 2008 relays the appropriate types of business structures in South Africa.

Sole ProprietorshipA sole proprietorship, which is often referred to as a sole trader, is a business structure that is owned and run by one individual.It is important to note that with a sole proprietorship there is no separation between the owner and the business structure – the business does not have its own legal entity. In practise this means the income of the business is all for the owner, as are the taxes and any liabilities.

PartnershipA partnership is akin to a coming together of between 2 and 20 people who contractually agree to operate a profit generating business together. They further agree to split any profits as per their agreement and in proportion to their interests.In establishing a partnership each partner needs to contribute to it and as per a sole proprietorship the partnership is not a separate legal entity, leaving partners generally liable for debts.

Private CompaniesThis type of business structure in South Africa does not place any prohibition on foreign shareholding and only requires one shareholder and one director.The new Companies Act prohibits a Private Company (Pty Ltd) from offering securities to the public.Private companies are separate legal entities and as such are taxed and offer the shareholders protection against liabilities.The Pty Ltd will require reservation of a company name, the completion of a memorandum of incorporation and written consent of the auditors, if any, to act for the company.

Public CompaniesA public company is largely set up to offer shares to the general public for the purpose of capital raising. There is a requirement for a minimum of one shareholder and three directors.Public companies are known as Ltd companies and have their own legal identity.



Personal Liability CompaniesIf a company incorporates under section 8(2)(c) of the Companies Act the terms of its memorandum of incorporation (MOI) state that the directors and past directors are jointly and severally liable, together with the company, for any debts and liabilities of the company, as are or were contracted during their respective periods of office. Typically, this means professions such as attorneys and accountants that make use section 8(2)(c) of the Companies Act.

State Owned CompaniesA State-owned company is either a company defined as a “state-owned enterprise” in the Public Finance Management Act 1 of 1999 or a company owned by a municipality. Most of the provisions of a public company will apply to state-owned companies as well.

Non-profit Companies (NPC)A non-profit company is incorporated public that is established, as an example, for some form of cultural or social activities or communal / group interests. Income is not distributed to any stakeholder from this type of business structure.

Foreign and External CompaniesExternal companies are foreign owned companies that are incorporated outside of South Africa but trade in South Africa. There is a requirement for foreign owned companies to register as an external company with the CIPC and they may not offer securities to the South African public.

This type of business structure in South Africa is utilised by foreign companies wishing to set up a branch in South Africa.

Close CorporationsIn South Africa one can still find organisations registered as close corporations, however since 1 May 2011 (under the new Companies Act of 2008), it is no longer allowed to register a new close corporation. A close corporation (or CC) was in most cases used for smaller type businesses.

1.3 Identify potential business opportunities (US 7345 SO1 AC1)

When evaluating new business, the bank will review the possible business opportunities available to the new client. This will include:• The types of products and services offered

• The market and industry environment the business operates in. According to Brand South Africa (https://www.brandsouthafrica.com/investments-immigration/economynews/south-africa-economy-key-sectors [Accessed 10 December 2020] the following industries are operational in South Africa:

° Manufacturing

° Mining

° Agriculture

° Communications

° Tourism

° Wholesale and retail trade

° Finance and business services

° Investment incentives



• Location will play an important role in the general operations of the business as well as future growth. From an insurance point of view, it may also impact the security of the business and possible threats or losses.

1.4 The following section covers various topics and for ease of reference see breakdown below:• Determine pricing and general risk rating by identifying the market

and industry segments (US 7345 SO1 AC3)

• Analyse industry-related local and international trend to assess opportunities and risks (US 7345 SO3 AC3)

Banks assess the creditworthiness of their business clients before their involvement with clients and regularly during the relationships. Most banks use an internal rating system to evaluate the likelihood of a business client defaulting on its obligations.

The following are examples of factors that contribute to the overall assessment:• Banking industry oversight regulations (ensures the stability of the

banking industry);

• Client market and industry attractiveness

• The client’s probability of default:

° Quantitative data including financial ratios (should a client company’s ratios deviate significantly from

historical, forecast, or industry standards a more detailed analysis will need to be conducted); and

° Qualitative data, for example about the industry and management team.

• Length of the loans (long maturity loans are more susceptible to volatility).

Weightings are applied to the identified parameters depending on their significance in pricing and managing the risk. Some banks implement two connected rating systems, for example:• The general creditworthiness of the debtor (obliger rating); and

• A rating to each facility (eg. Loan) outstanding (facility rating).

Added to the above, the facility rating would consider any assigned collateral offered a protection against default.

The cost of pricing and managing risks is incorporated into the credit terms. Once the analyst has rated a business client, the assessment is signed off by the appropriate manager (or committee) (Treasury Today, 2005).

When considering the industry and the business, two important factors include:• Industry analysis (eg. PESTEL analysis, Porte’s Five Forces Model):

and

• Business analysis (context):

° Business context (eg. SWOT analysis);

° Market and marketing analysis (eg. 4P’s analysis) and

° Financial analysis (eg. going concern including



solvency and liquidity, future financial stability).

An industry exists to serve specific markets. Consider that the hospitality industry is comprised pf, for example, hotels, game lodges, and B&B’s that service the needs of business travellers and tourists. Industry analysis (or attractiveness) attempts to interpret the overall relevance of a particular industry to the needs of its market and the potential for profits.

An industry that is losing its dominance to, for example, a new technology or product substitutes does not present sustainable profits (i.e. growth prospects, future financial stability).

To carry out an industry analysis the starting point is a PESTEL analysis which considers external factors and the changes taking place relevant to the industry:• Political factors (e.g., taxation policy, trade regulations,

governmental stability, unemployment policy);

• Economic factors (e.g., inflation, spending power, number of people at a pensionable age, recession or boom, number of business start-ups, liquidations);

• Socio-cultural factors (e.g., values, beliefs, cultural factors, living standards, literacy, education levels);

• Technological factors (e.g., Internet and e-commerce, social media, research and development, rate of technological change);

• Environmental factors (e.g., waste disposal, carbon footprint and pollution, energy and water consumption); and

• Legal factors (e.g., patent law, employment law, health and safety, product safety, advertising regulations, product labelling).

Both local and international factors may be of importance. For example, the tourist industry in South Africa may be impacted by political factors in Europe (e.g., refugee crisis) and economic factors locally (e.g., weak rand) both of which might make SA an increasingly attractive destination.

Figure 2: Porter’s Five Forces Model

The next step is to determine industry attractiveness using Porter’s Five Forces model. This model considers the strength of competition (i.e., new entrants and rivalry among existing companies), the power of suppliers and buyers (customers), and the threat of substitutes (i.e., different goods that, at least partly, satisfy the same needs of the consumer).

POTENTIALENTRANTS

SUPPLIERS

BUYERS

SUBSTITUTES

INDUSTRY COMPETITORSRivalry among

existing companies

Threat of new

entrants

Threat of

substitues

Bargaining power of suppliers

Bargaining power of buying

Our bank hasn’t done much business with clients in the hospitality industry over the past five years. The focus has been on, for example, the construction industry.Do you think the hospitality industry is more attractive now? Why? Support your opinion using relevant factors from a PESTEL analysis.



Consider the following possible factors (Grant, 2013):• Threat of entry:

° Profitability (if an industry earns a return on capital in excess of its cost of capital it will act like a magnet to companies outside the industry);

° Capital requirements (low capital outlay makes entry easier, e.g., street vendor versus factory);

° Economies of scale and cost advantages (e.g., production efficiencies, access to channels of distribution);

° Product differentiation (e.g., brand recognition);

° Legal barriers (e.g., licence, patent); and

° Retaliation (e.g., from existing companies such as aggressive price cutting).

• Industry rivalry: ° Concentration or diversity of competitors (i.e., market share,

the extent to which companies can avoid price competition);

° Product differentiation (i.e., commodity versus highly differentiated products);

° Expert knowledge (e.g., core competencies); and

° Cost conditions (e.g., scale economies and cost structures).

• Supplier power: ° Bargaining power (e.g., size and concentration

of buyers relative to suppliers); and

° Scarce resources (e.g., labour, raw materials, capital).

• Buyer power: ° Price sensitivity (e.g., how important the

products are to the buyer);

° Product choice (e.g., likelihood of switching on the basis of price); and

° Switching costs (e.g., likelihood of switching on the basis of convenience).

• Substitute competition: ° Buyer’s propensity to substitute (e.g., switch to

substitutes in response to price increases); and

° Performance of substitutes (e.g., substitute is more effective, efficient, and or economical).

Understanding the industry structure – the main players (competitors, suppliers, buyers, potential new entrants) – helps you to forecast industry profitability before committing bank resources to clients (existing or new in the industry). “Investment decisions made today will commit resources to an industry for years” (Grant, 2013).

Predicting the future profitability of an industry

To predict the future profitability of an industry, Grant (2013) recommends three stages:1. “Examine how the industry’s current and recent levels of competition and

profitability are a consequence of its present structure.



Potential bank clients must be able to show how they intend to position their companies (i.e., where competitive forces are weakest). For example, traditional book retailing has been devastated by online retailers. The survivors are those that have positioned themselves to avoid these powerful competitive forces by creating a different experience such as in-store cafés and reading sections.

In South Africa, industries that provide services rather than physical products are reported as being some of the most profitable (and hence attractive). The Entrepreneur (2016) reports the following: “Accounting and tax services take the top spot on the list of the most profitable type of small business with a generous 18.4% net profit margin followed by real-estate services (15.2%), law firms (14.5%), and doctor’s offices (13%)”. Service industries are driven by human capital, and typically lower overhead and start up costs. When conducting an industry analysis it is important to make the distinction between products and services.

Figure 3: SWOT analysis

(Kotler and Armstrong, 2013)

Positive Negative

Internal

External

StrengthsInternal capabilities that may help a business reach its objectives

WeaknessesInternal limitations that may interfere with a business’s ability to achieve its objectives

OpportunitiesExternal factors that the business may be able to exploit to its advantage

ThreatsCurrent and emerging external factors that may challenge the business’s performance

Through knowing the industry, its structure, and the business’s strengths, weaknesses, opportunities and threats, it is better placed to detect appropriate market segments and develop products and services to meet demand.

2. Identify the trends that are changing the industry’s structure. Is the industry consolidating? Are new players seeking to enter? Are the industry’s products and services becoming more differentiated or more commoditised? Will additions to industry capacity outstrip growth of demand?

3. Identify how these structural changes will affect the five forces of competition and resulting profitability of the industry. Will the changes in industry structure cause competition to intensify or weaken? Rarely do all the structural changes move competition in a consistent direction, typically some factors will cause competition to increase; others will cause competition to moderate.”

While products make up inventory, labour is transient (especially sort after expertise). A service business can fail if it loses its core competencies.A market is made up of customers (individuals or businesses) which can be categorised by their buying behaviours (i.e., segments).

A business analyses its market to find attractive opportunities and identify threats. It must also determine its business strengths and weaknesses This is called a SWOT analysis (Kotler and Armstrong, 2010).



Marketing analysis examines market demand for products in relation to the 4Ps in the marketing mix:• Product (goods and services) – variety, quantity, design, features,

benefits, brand name, packaging;

• Price (the amount of money the customer is willing to pay for products and services) – list price, discounts, allowances, payment period, credit terms;

• Place (where the customer can obtain products and services) – channels, coverage, locations, inventory, transportation, logistics; and

• Promotion (the activities that communicate the products and services to the customers) – advertising, personal selling, sales promotion, public relations.

Analysts at the bank must look for potential problems that the client might face such as the client’s business creating a product that no one wants to buy, or a business with a highly innovative product but one that is too expensive for the target market.

When analysing the business of a client the 4-Ps concept takes the seller’s (client’s) view of the market. From the buyer’s viewpoint the analyst might also consider the 4Cs (Kotler and Armstrong, 2010, p.67):4 P’s:ProductPricePlacePromotion

4 C’s:Customer solutionCustomer costConvenienceCommunication

1.5 Recording the current company profile (US 7345 SO1 AC4)

Company profiles contain information about client businesses. This information is stored electronically in the bank’s database. You will remember from the discussions in section 2 that banks must comply with the FIC Act, namely “know your client” record keeping and reporting obligations. In addition to this the bank records information about the client’s business some examples of which are listed below. Table 4: Business client profile information

Type of information

Description

Company age Statistics reveal that 80% of start-ups in SA will fail within the first three years depending on several factors, e.g., the economy, industry, and forms of support (e.g., incubation programmes, mentoring, financial support).



Structure of company

The company organogram provides the hierarchical structure of a company. This may include head office, divisions, departments, branches, etc., depending on the management and operational needs of the company and its culture (e.g., traditional hierarchy versus flatter organisation). Companies can be structured by function (e.g., operations, marketing, finance, research and development), by geographic region (e.g., Gauteng, Western Cape), or by product. There are advantages and disadvantages to each structural type which are weighed up to determine the most effective, efficient, and economical structure for the company to achieve its goals and objectives.

Organisational structure evolves over time from start up to large company.

Turnover The annual sales the company makes

Risk grade Risk grade – a variety of factors can be considered, including:• Systematic Risks• Unsystematic Risks• Credit of Default Risk• Market Risk• Liquidity Risk• Country Risk• Operational Risk• Reputational Risk• Systemic Risk(To find out more about these risks, read the article: Types of Risks in Banks – Concepts and Definition, https://www.oliveboard.in/blog/types-of-risks-in-banks/ [Accessed 10 December 2020]

Demographics The area the company is situated, e.g. rural versus industrial, can also include the province.

Management profile

It is useful to know the:• Key role players (decision-makers) and their assistants;• Knowledge workers (sources of information); and • Professional statuses (e.g., chartered accountant, professional

engineer).The collective management team should exhibit competencies across key areas depending on the nature of the industry and business, e.g., strategy, leadership, innovation, finance, marketing, operations, research and development, project management.

Size Large companies are typically regarded as solid and reliable but slowly growing businesses. In contrast, small companies are more volatile (potential to grow profits very fast but also lose money and go bankrupt quickly). Mid-sized companies tend to display characteristics of both other two categories. Depending on the bank’s tolerance for risk it will determine whether to focus on large, mid, or small companies.The value of the company can be measured according to:• Market capitalisation which is the number of shares

outstanding multiplied by the current share price on the stock exchange;

• Asset valuation which measures the net realisable value of all the assets;

• Discounted cashflow which measures the value of the predicted cashflow, plus terminal value, and then this is discounted to provide the current business valuation; and or

Industry valuations which is an industry rule of thumb based on other companies that have been sold.



Staff Small or large staff component, whether centralised or decentralised, only national or also international.

Shareholders This can include if it is a private or public company. The spread of shareholders meaning a variety of shareholders or majority of shares held by one individual / organisation

Ownership (the legal form and ways in which business ownership have been acquired)

In chapter 1 we looked at the legal forms of companies (profit and not-profit). Business ownership means having control over a business entity and being able to dictate how it functions and operates under these legal forms. Broadly, there are three ways in which business ownership may be acquired: a business start-up, purchasing a business that already exists, and franchising. Each of these has its advantages and disadvantages. Let’s look at franchising as an example. The franchising model is a combination of start-up (high risk) with existing business ownership (moderate risk depending on for example the strength of the franchisor and brand). Franchising means obtaining the rights to market the products and services of another company that is already well established in the market and therefore the risks of a new franchise start up are lower. Examples of other factors to consider when evaluating ownership risks: shareholders (partial ownership of a company and with that comes rights) and family businesses (issues of succession and family disputes).

Credit rating The credit rating is the ability of the company to fulfil its financial commitments based on previous dealings (i.e., its creditworthiness). A credit rating can be assigned to the company by the bank and or a credit rating agency.For example, Standard & Poor’s provides global credit ratings (general purpose and special purpose ratings).

Their AAA rating means that the company’s capacity to meet its financial commitments is extremely strong, whereas C means highly vulnerable to non-payment.

1.6 Visit the site and premises

1.7 Collection of various information

(US 7345 SO3 AC1)

(US 7345 SO3 AC2)

A client site visit is a pragmatic way in which to see the full scope of the business (e.g., head office, production, warehousing, operations, retail outlets, etc.) This also provides an opportunity to build a relationship with the client.

Site visits require preparation:• The purpose of the site visit (e.g., to verify information in the

financial statements);

• Who you will be meeting (e.g., names, departments, designations);

• General discussion points (e.g., trends in the industry);

• Aspects that the bank wants to probe or verify (e.g., supplier power, competition in the industry, assets and liabilities);

• What the client needs from the bank in the short- and long-term (e.g., working capital, short- and long-term funding);

As a consultant you may want to find more information about your customer and there are various ways in obtaining these:



1.8 Comparison of financial data

1.9 Analysis of budgeted and forecasted data according to industry predictions`

(US 7345 SO3 AC4)

(US 7345 SO3 AC5)

Budgets are the result of careful planning by management together with the employees of a business.This planning will be done over a period and the aim is that certain objectives and goals set must be reached.

Budget plans and operational objectivesEach operational objective in the business should be linked to a set budget plan.In all business entities, the business is divided into the following departments:• Cost centre or

• Profit centre.

Cost centreA cost centre is a sub unit of a business that adds to the cost of the company and does not contribute any income to the business.The cost department tries to reduce costs which effects the bottom-line profits of the business indirectly.Examples of cost centres are: • The administration departments, like the HR Department.

• IT department, or

• The production department and service departments in a factory and include research and development, marketing and customer service.

Examples of financial data include:• Fixed assets e.g. property and vehicles

• Current assets e.g. money in a bank account

• Long-term liabilities e.g. paying off a bond

• Short-term liabilities e.g. store and credit cards

• Monthly / annual salaries

• Taxes payable

• Pension funds

It is now possible to do a comparison between different years or even between industries to be able to do comparisons. These comparisons can then indicate e.g. growth, issues with liquidity or profitability etc.

• Specialists – people or organisations specialising in certain industries can have valuable information on your customer’s industry, opportunities, threats, growth potential etc.

• Electronic media – a source of interesting information as reported in the media, however, recently a number of these websites will now charge a fee to obtain the information.

• Print media – articles from newspapers, articles published in journals etc.



In main aim in the cost centre is to try and REDUCE costs to a minimum. There are some significant advantages to classifying simple, straightforward divisions as cost centres, since cost is easy to measure.

However, cost centres create incentives for managers to under-fund their units in order to benefit themselves, and this underfunding may result in adverse consequences for the company as a whole.

Because the cost centre has a negative impact on profit, it is a likely target for roll-backs and layoffs when budgets are cut. Operational decisions in a cost centre, for example, are typically driven by cost considerations. Investments in new equipment, technology and staff are often difficult to justify to management because indirect profitability is hard to translate to bottom-line figures.

Profit CentreA profit centre is a that department or section of a business that creates profit for the company. It is responsible for the revenues and costs. It usually has control over the Revenues of a business, costs and the profits derived from the activities.

Examples of the Profit Centre are: • The production or manufacturing plant, and the

• Sales Department

In the profit centre the aim is to INCREASE profits to maximum.This means that management must in terms of planning and responsibility drive the sales revenue generating activities which leads to cash inflows and at the same time control the cost (cash outflows). This makes the profit centre management more challenging than cost center management.

Profit centre management is equivalent to running an independent business because a profit centre business unit or department is treated as a distinct entity enabling revenues and expenses to be determined and its profitability to be measured.

The aim of both the departments is to add something to the bottom-line profit of the business. Therefore, a lot of internal planning must go into these cost and profit centres to reach the anticipated goals.

The budget is formulated according to standard operating proceduresStandard operating procedures is an organisational guideline containing step-by-step instructions to assist employees to carry out complex routine operations. The purpose is to achieve efficiency, quality, standardisation in performance and ensure compliance with industry regulations.

So, what is a budget?A budget is a written document that depicts the forecasts and financial plan of a business for a future period.Budgets are usually compiled along a formal framework.It is drawn up by management to depict how they are going to reach certain goals in the future for the business.It serves as a financial plan and control and makes everyone in the organisation aware of the goals set and the targets that should be achieved in the future.

To achieve a satisfactory forecast, management usually compile a budget, in which they depict their goals over a period of time and strive to achieve results as close as possible to what is budgeted or strive to improve the profitability and cash flows of the company.



Budgets are usually drawn up for a period of time and can be projected over a year or even many years and each year can be broken down into months and weeks and even daily!

Companies, individuals and the government draw up budgets every year where they try and predict:

The reason why companies, government and individuals’ budget are so that they can make sure their expenses do not exceed their income (so that they don’t spend more than they earn).

An example of a simple company budget for a company selling hamburgers could be:

For companies For the government

For an individual (you and me)

How much money is coming in? (Revenue)

This is their revenue – they get it from selling their products and services and from the interest they get from the bank if they have money in savings

This they get from taxes – companies and individuals pay tax. VAT is also a form of income for the government.

This is the salary or wages that you earn or the social grant that you receive.

How much money is to be spent? (Expenses)

They need to work out what they need money for. Examples include:• Rent• Salaries• Cost of raw

materials• Cost of

production• Tax• Savings

They need to work out what they need money for. Examples include:• Social grants• Education• Defence• Public works• Salaries• Health care

They need to work out what they need money for. Examples include:• Rent• Food• Clothing• Schooling• Transport• Tax• Savings

How much money is left over at the end of the month? (Profit or loss). (Revenue – Expenses)

Revenue – Expenses Taxes – Expenses Salary – Expenses

Budget for one month:

Revenue (income)

Sold 100 hamburgers R7 x 100 R 700

Expenses

Rolls (100) 100 x R2 R 200

Hamburger patties (100) 100 x R2 R 200

Tomato sauce and mustard R 50

Electricity to heat the hamburgers R 30

Posters R 50

Flyers R 50

Total expenses for month 1 R 580

Profit (revenue – expenses OR R700 – R580) R 120



The areas that are highlighted are the start-up costs – the costs that we need to incur BEFORE we sell anything to anyone.

In the first month, this company will not make a big profit because it has start-up costs (poster, flyers, and basket to carry the hamburgers in), but from month 2, it should make R200 a month profit.

Advantages of a financial budgetA budget is the process of setting short-term and long-term goals for the organisation.• If the information used to create the budget is accurate, the

budget serves as a blueprint for operations from month to month,

• The Budgeted figures are compared to the actual results obtained as well as industry related standards.

• The results will give an indication if adjustments must be made in operations of the organisation.

• From this perspective, it becomes a powerful tool for measuring how well the organisation is doing with meeting its long-term financial goals and being able to periodically report those findings to shareholders or organization members in a timely manner.

Sources of information for budgets

Developing a Budget

Developing a Business Plan

Research Historical Information

Present the budget at a meeting and ensure everyone is satisfied

Make modification as time goes by when more information comes to hand

Monitor the financial performance of the organisation against the budget

Consult with Key Personnel

Set financial goals and objectives

Determine strategy and investigate

costs

Look at previous years

financial statements

Key personnel provide

estimates

Look at previous years budget (if one

exists)

Key personnel check reality of financial

goals

The Business plan Business plans and budgeting are inseparable. All businesses shoulddevelop a business plan. The purpose of developing a business plan isto set the goals and objectives of the business(strategic plan), and todetermine what work must be done and by whom to achieve theseobjectives (operational plan)



Historical Information Historical information is obtained from the organisation’s accounting system when creating a budget for next year. This information can also be obtained from last year’s financial statements and budget.

The Knowledge of Key Personnel in the organisationUsually a team of people is involved when compiling a budget. All levels of management should participate and contribute to the budget planning process.

Each participant contributes by providing information and estimates of revenues (if any) and costs for certain sections or departments of the organisation for which they are responsible or associated with. It is likely that such individuals will be able to provide reasonably accurate forecasts of income and expenditure.

Steps to compile a budgetStep 1: Establish the relationshipYou may wonder, “If I’m creating my own budget, why do I need to establish a relationship with myself?” Budgeting begins with self-awareness. Popular New Year’s resolutions include creating a budget and going on a diet, and most of those resolutions fail within weeks. While budgets and diets commonly fail because of poor planning and/or execution, the reason for poor planning and/or execution is a lack of self-awareness, which begins with making a few personal observations. Know the reason for creating the budget, how much time to give yourself to establish and maintain the budget successfully and what obstacles might prevent your success.

Step 2: Gather dataCollect all information that documents how much money comes in (in-flow) and how much goes out (out-flow). Document in-flow with pay stubs and/or recent tax returns. It is wise to begin an annual budget by breaking it into months. Find in-flow by averaging monthly net income (take-home pay after taxes and payroll deductions).

Document out-flow with bank and credit card statements or online resources that capture all your spending. Also include purchase receipts.

Step 3: Analyse the dataThis task takes three to six months of tracking and observing the data sources--in-flow and out-flow. Organise the expenses into two primary categories: non-discretionary and discretionary, each of which will have subcategories. The non-discretionary subcategories include essential items, such as mortgage/rent, utilities and food. The discretionary subcategory items are those you possibly could live without. Once your data is organised, look for areas of spending that are out of control.

Step 4: Develop a planOnce you have a firm grasp of average monthly in-flow and out-flow, you are armed with information to develop the annual budget. If you spend more money than you bring home, reduce or remove some or all discretionary spending before you develop the budget. Depending upon your personal finances, you may want to prioritise funding an emergency fund (three to six months of expenses), debt reduction, retirement savings, education savings and rewards, such as travel and entertainment--possibly in that order.



Step 5: Implement the planCarry out the plan you developed.

Step 6: Monitor the planThis may be the most crucial task in the compilation and formation of an annual budget. It takes you back to where you asked some crucial questions for the purpose of observation and self-awareness. Identify what worked in the budget, what did not work and whether you can implement the budget without creating too much stress on yourself or loved ones. It is also important to leave yourself a small amount for life’s little pleasures.

Let’s look at six tips that will help you plan your small business budgets.

Tip No.1: Check industry standardsNot all businesses are alike, but there are similarities. Therefore, do some homework and peruse the local library for information about the industry, speak with local business owners, and check the internet to get an idea of what percentage of the revenue coming in will likely be allocated toward cost groupings.

Small businesses can be extremely volatile as they can be more susceptible to industry downturns than larger, more diversified competitors, so you only need to look for an average here, not specifics.

Tip No.2: Make a spreadsheetPrior to buying or opening a business, construct a spreadsheet to estimate what total dollar amount and percentage of your revenue will need to be allocated toward raw materials and other costs. It’s a good

idea to contact any suppliers you’d have to work with before you continue. Do the same thing for rent, taxes, insurance(s), etc.

Tip No.3: Factor in some slackRemember that although you may estimate that the business will generate a certain rate of revenue growth going forward or that certain expenses will be fixed or can be controlled, these are estimates and not set in stone. Because of this, it’s wise to factor in some slack and make sure that you have more than enough money socked away or coming in before expanding the business or taking on new employees.

Tip No.4: Look to cut costsIf times are tight and money must be found somewhere in order to pay a crucial bill, advertise, or otherwise capitalise on an opportunity, consider cost cutting. Specifically, look at items that can be controlled to a large degree. Another tip is to wait to make purchases until the start of a new billing cycle, or to take full advantage of payment terms offered by suppliers and any creditors. Some thoughtful manoeuvring here could provide the business owner with much needed breathing and expansion room.

Tip No.5: Review the business periodicallyWhile many firms draft a budget yearly, small business owners should do so more often. In fact, many small business owners find themselves planning just a month or two ahead because business can be quite volatile and unexpected expenses can throw off revenue assumptions.

Tip No.6: Shop around for services/suppliersDon’t be afraid to shop around for new suppliers or to save money on other services being performed for your business. This can and should



be done at various stages, including when purchasing or starting up a business, when setting annual or monthly budgets, and during periodic business reviews.

Business and financial objectivesBusiness Objective / (Strategic planning):• Business objectives are those that relate to the business as a whole

• They are usually set by the top management of the business and they provide the focus for setting more detailed objectives for the main functional activities of the business

• Operational planning tends to focus on the desired performance and results of the business

• It is important that corporate objectives cover a multitude of key areas

• Most enterprises will draw up a set of goals that they wish to reach within a certain period

• In order to achieve a satisfactory forecast, management usually compiles a budget, to depict their goals over a period

• `They then strive to achieve results as close as possible to what is budgeted

• They also strive to improve the profitability and cash flows of the company

Financial year (12 months)• Individuals are subjected by jurisdiction (SARS) to prepare their

income returns for a financial year which runs from 1 March to 28 Feb of each year

• Most enterprises and Registered Companies’ prepare and record their accounting books for a financial year, which is the same accounting period as that set by the Tax Act

• Registered Companies may choose any other dates as their Financial year end (e.g. 30 June or 31 December - and their financial year will run 12 months prior to the set date)

Accounting Period (any period of time)• A full accounting period is usually the same as the financial year

(12 months)

• But it can be a portion of the financial year (e.g. a week, a month, a quarter – 3 months, or half year – 6 months, etc.)

Budgeting process and structureBudgets are the result of careful planning by management together with the employees of a business.

This planning will be done over a period of time and the aim is that certain objectives and goals set must be reached. Master BudgetThe Master budget is compiled from several different budgets for an enterprise.

This main budget comprises a set of interlinked budgets containing all the Operational planning and Financial planning for a specific period.

All these different budgets make up the Master budget, resulting in a Cash budget, Income statement budget and Balance sheet budget.



Factors to considerFactors to consider when preparing a budget are:• Time or accounting period of the budget

• Income (Revenue) – Sustainability

• Credit policy & Invoicing procedure

• Overheads of the entity (variable and fixed)

• Borrowings

• Your suppliers’ credit policies

• Interest rates

Interest is the ‘cost of money’. If you borrow money from the bank, they will charge you interest. If you have savings in the bank, then the bank is ‘borrowing’ from you, so they pay you interest.

In our business, management have drawn up a budget for the next 10 years.

This document spells out how much sales and expenses they expect to earn and incur in the future.

10 years is a long time and according to me a lot can happen in that time and their whole budget can go for a loop!

They do however re-look at the budgeted figures every year and they give each department a budget every year and explain to us exactly what our weekly and monthly targets must be.



Review the drafted budgetOnce the drafted budget has been completed, it is vital that the budget be reviewed. It is also important to include staff members in the department to give their opinion and views. Staff who are included in these decisions tend to feel part of the process and will therefore be more involved in the business and this is beneficial to the organisation.

Reflection can make use of the SMART principles:Specific: specific areas in the unit you want to change or improveMeasurable: can it be measured; can you track the performance?Assignable: is the objective clear for the unit to understand the part or role they will play?Realistic: is it achievable and reasonable or will staff consider it to be something that is unattainable and out of the question?Time: does it fall within a reasonable time-frame or are expectations too high for e.g. reaching the time period in a much shorter time frame than staff members consider fair?

If we make the budgeted targets we often get rewarded by management. They take us for lunch, or we get the afternoon off.

If we do not make the targets that they anticipated, they call us in and ask us why we did not make target and we must please explain.

This budget keeps us on our toes all the time and drives us to reach goals set by management and keep everyone happy.

Should any of the above concerns be raised, now is the time to modify the plan. If this is not done, then chances are high that the budget will not be in alignment with the operational plan of the unit. This will lead to failure, pessimism amongst staff members and a general low morale.

The Types and formats of financial forecastsThere are two main methods of forecasting (Accounting Tools, 2016):• Quantitative (relies on quantifiable data that can be statistically

manipulated such as historical sales and inflation rates); and

• Qualitative (relies upon information that cannot be measured such as opinions based on experience).

Examples of quantitative methods include (Accounting Tools, 2016):• Causal methods (assume that the item being forecasted has a

cause-and-effect relationship with one or more other variables; e.g., restaurant sales and the opening of a new theatre across the street; the primary causal analysis method is regression analysis); and

• Time series methods:

° Rule of thumb (using existing data, e.g., copying forward historical data without alteration);

° Smoothing (using averages of past results, with or without weightings for more recent data, thereby smoothing out irregularities in the historical data); and

° Decomposition (breaking down historical data into its trend, seasonal, and cyclical components and then forecasting for each one).



Examples of qualitative methods include (Accounting Tools, 2016):• Market research (questioning current and potential customers

about their needs for products and services; useful for detecting changes in buying behaviour);

• Opinions from knowledgeable persons (e.g., senior management, sales staff, experts/specialists); and

• Delphi method (using a facilitator and a group of experts’ multiple iterations of a question provide a consensus opinion).

Qualitative methods are usually necessary for start-ups and new products where there is little historical information that would otherwise be used for quantitative analysis.

Forecasting pointers and sources of financial forecastsHere we provide forecasting pointers which should be evident in forecasted financial statements.

Key assumptions should be selected carefully when generating forecasted financial statements. Examples include:

Assumptions should be justified.

Revenue and expenditure forecasts are introduced with a summary of the methods used to determine each forecasted item. Tables, graphs, and other representations of data are used to support discussion.

All the items in the forecasted statement of profit and loss are included here (e.g., monthly for the forthcoming year).

Cash flow projections are presented using the same periods provided in the revenue and expenditure forecast.

The financial position is a snapshot in time and therefore represents the forecasted position at the end of the financial year.Note that all the above forecasts must represent the same time-frames for the purposes of analysis.

Financial planning and factors in preparing financial forecastsThe financial plan is a part of the overall business plan. The overall plan (including the financial plan) may look like this (Bplans, 2016):1. Executive summary;2. Company summary;3. Products and services;4. Industry and market analysis;5. Strategy and implementation summary;6. Management summary;7. Financial plan: a. Break even analysis (the point at which revenue received equals

the costs associated with receiving the revenue); b. Projected profit and loss; c. Projected cash flow;

• Inflation rates

• Interest rates

• Exchange rates

• Demand (sales)

• Tax rates

• Cost of capital

• Costs (materials, labour, etc.)

• Cash conversion cycle

• Working capital

• Risks

• Life expectancy of assets

• Dividend pay-out

• Etc.



Factors that are incorporated in the preparation of financial forecastsA variety of factors can be considered for the preparation of forecasts. Forecasts can sometimes be viewed as a “thumb suck” but one should try to include as many factors as possible in order to have good forecast that will also be viable for the organisation. Always review these factors since these are ones that the organisation does not have any control over. However, they can have a huge impact on the day to day running of the business.

• Political factors: consider factors such as possible changes in tax payable, the 2018 change to VAT from 14% to 15%, even something such as the upcoming elections in 2019 may cause investors to be more conservative specifically to avoid financial losses.

• Economic factors: increase in inflation and interest rates may cause the consumer to have less disposable income and therefore the possibility that they will no longer purchase your organisations products or even make use of your services. Specifically, if you are selling a product that is expensive or consumers are of the opinion that they can do without that product.

• Social factors: in South Africa our unemployment rate is very high. According to Trading economics (https://tradingeconomics.com/south-africa/unemployment-rate ) South Africa’s unemployment rate rose to 30.8% in the third quarter of 2020. The previous

d. Projected balance sheet; and e. Business ratios.8. Appendices.

period was 23.3%. This was below market expectations of 33.4%. This was the highest jobless rate since 2008 when quarterly data became available.

• Technological factors: working in an industry where there is a high focus on technological changes to your service or products? Customers tend to follow the trail of those organisations who are pioneers in the technological field, specifically younger consumers. Instant gratification and the present are very important to this group. If your organisation is seen as lacking in technological “savvy” or even fall behind other organisations, you will surely loose consumers.

• Environmental factors: in an era where the environment and the impact of products play an important role, the organisation must consider their “green footstep”. What are you doing about water saving, plastic bags and / or containers and in general doing business in an environmentally friendly manner?

• Legal factors: pay attention to any changes in this environment since it can have a huge impact on your business. The new National Minimum Wage came into effect on 1 January 2019. This was a huge achievement for the working people in South Africa and a good example is in the hospitality industry, were many workers only earned tips.

• Demand and supply be careful in making forecasts for demand and supply. The organisation should know their market as well as the consumers they offer services or products to in those markets. Substitutes such as meat and chicken or even change of suppliers can have a huge impact on the sales the organisation forecasts.



• Pessimistic or optimistic view: it is a good idea when doing forecasts to take both pessimistic as well as optimistic views on future situations. If the organisation is too optimistic, they may be in a situation where the revenue was overestimated, and expenses underestimated which can cause a variety of problems over the short-term as well as long-term. A pessimistic view allows forecasts to take several items into consideration and will lead to a more conservative view which can serve the organisation better over a long-term period.

• Assumptions: be very careful about the consumptions made in financial forecasts. Try to gather more information on the topic, obtain research reports or even industry views to assist in making a decision.

• Sales: review the current market. Then break it into smaller parts by reviewing the percentage of the market your organisation would like to reach. Secondly, how many of the market will consider buying your product or service and then your forecast in the true number of people that eventually will purchase the product or service. Also consider the average amount that will be spent on the product per month.

• Comparisons: do comparisons with organisations within your industry. Review published financial statements. Review research reports as well as industry standards and forecasts. All of these will help you in obtaining numbers that are more valid with regards to forecasting.

Financial forecasts and viability• Financial viability allows the organisation to generate sufficient

income to be able to pay for operating expenses comply with debt commitments and grow the business whilst at the same time maintain service levels.

• The following can be some factors to consider when reviewing the viability:

° economic factors – is the country in a recession, what is the general growth outlook for the next 12 months?

° labour market – e.g. what will the impact of the minimum wage have on the business and staff working for the business?

° profit margins relating to the industry – how does the organisation compare with others in a similar industry?

° maturity of the relevant industry – is the product or business still viable to the consumer or is there a pattern / trend of constant decreasing in sales? A good example could be landlines. Since the introduction of cellular phones, most individuals have opted to cancel their landlines except in situations where they also use it for data lines.

1.10 Nature and range of client’s needs and desirability of bank involvement (US 7345 SO3 AC6; SO2 AC1/2/3/4/5/6)

Identifying and understanding the financial needs of a business client is critical to offering the appropriate banking products and services. Ideally, clients should anticipate (forecast) their financial needs rather than trying to source credit under pressure.



Examples of client needs include:• Short and long-term funding requirements to facilitate the cash

conversion cycle (you will remember from Banking 4 that working capital is required to facilitate the cash conversion cycle during regular and seasonal periods);

Added to this, it is difficult and more costly for business clients to get approval for loans when they are in financial trouble. Furthermore, it is the duty of thee bank consultant to always act in a polite and professional manner and to ensure proper and correct client record keeping in compliance with the acts applicable to the banking environment.

It is important to maintain open and frank conversations withthe business client to uncover the actual needs of the business (all the while, remembering to be respectful and polite).

I have found that understanding the reason why the client requested the meeting can give you a starting point for your research into the business. However, during your research and analysis, you may find that the real reason is not the one that the client gave you. It is important that you never take a client’s comments, reasons and descriptions at face value as you must be able to back these up with facts.

You need to ask yourself, “are the needs that the client is expressing their own ‘personal needs’ for the business, or are they seeing the bigger picture?”The management team are not always the owners of the company – they may only be “agents” of the company and as such they do not always act in the best interests of the company. For more on agency theory go to: http://study.com/academy/lesson/agency-theory-relationships-of-principals-agents.html

• Bank credit e.g., merchant card facilities (a business can lower its working capital if it can speed up is operating cycle, e.g., if the business accepts bank credit such as a Visa card it will receive cash sooner after the sale is transacted than if it has to wait until the customers pay their accounts);

• Overdraft facilities for other shortfalls;

• Leasing and asset finance (e.g., fleet management, equipment);

• Tailor-made products and services for specific industries (e.g., agriculture).

Businesses can either apply a conservative or aggressive funding strategy. Short-term funds are typically less expensive than long-term funds. This is because interest rates on short-term loans are typically lower than rates on long-term loans. Long-term funds allow the business to lock in its cost of funds over a period of time and thus avoid the risk of increases in short-term interest rates. Further, long-term funding ensures that the required funds are available to the business when needed. Short-term funding exposes the business to the risk that it may not be able to obtain the funds needed to cover its seasonal peaks (Gitman and Zutter, 2015).

Under a conservative funding strategy, the business funds both its seasonal and its permanent requirements with long-term debt. Under an aggressive funding strategy, the business funds its seasonal requirements with short-term debt and its permanent requirements with long-term debt.



Example of Semper Pump Company – aggressive funding strategyThis business has a permanent funding requirement of R135,000 in operating assets and seasonal funding requirements that vary between R0 and R990,000. The average requirement is R101,250. If Semper can borrow short-term funds at 6.25% and long-term funds at 8%, and if it can earn 5% on the investment of any surplus balances, then the annual cost of an aggressive strategy for seasonal funding will be:Cost of short-term financing = 0.0625 x R101,250 = R6,328.13Plus, cost of long-term financing = 0.0800 x R135,000 = R10,800.00Less earnings on surplus balances = 0.0500 x 0 = 0Total cost of aggressive strategy R17,128.13Because under this strategy the amount of financing exactly equals the estimated funding need, no surplus balances exist.(Gitman and Zutter, 2015, p. 660)

Example of Semper Pump Company – conservative funding strategyAlternatively, Semper can choose a conservative strategy, under which surplus cash balances are fully invested. From the previous example, this surplus will be the difference between the peak need of R1,125,000 and the total need, which varies between R135,000 and R1,125,000 during the year). The cost of the conservative strategy will be:Cost of short-term financing = 0.0625 x R0 = R0Plus, cost of long-term financing = 0.0800 x R1,125,000 = R90,000.00Less earnings on surplus balances = 0.0500 x R888,750 = R44,437.50Total cost of conservative strategy R45,562.50

Compare the above with a conservative funding strategy.

Where the business operates “between the extremes of the aggressive and conservative seasonal funding strategies depends on the management’s disposition toward risk and the strength of its banking relationships” (Gitman and Zutter, 2015, p. 661).

Banks offer several specialised services to their business clients, for example:• Agriculture (e.g., strategic planning and expansion programmes,

crop and livestock insurance);

• Black economic empowerment (e.g., BEE certificates);

• Fleet management (i.e., remove or minimise the risks associated with vehicle investment from procurement to disposal);

• Foreign exchange specialists;

• Franchising (e.g., manage the franchise relationship, vehicle and asset finance);

• Merchant banking (e.g., credit card facilities); and

• Property finance.

The average surplus balance would be calculated by subtracting the sum of the permanent need (R135,000) and the average seasonal need (R101,250) from the seasonal peak need (R1,125,000) to get R888,750 (R1,125,000 – R135,000 – R101,250). This represents the surplus amount of financing that on average could be invested in short-term assets that earn a 5% annual return.(Gitman and Zutter, 2015, p. 661)



1.11 Conclusion

1.12 Glossary of terms

1.13 References

The purpose of this chapter was to learn how to establish the nature and financial needs of a client’s business and research the industry and business context of the client.

To complete this unit standard successfully, you are encouraged to build on your knowledge your bank’s policies and procedures relating to client business research and assessment.

Accounting Tools. (2016). The going concern principle. Available from: http://www.accountingtools.com/going-concern-principle [Accessed 16 May 2016].Business Dictionary. (2016). Financial covenants. Available from: http://www.businessdictionary.com/definition/financial-covenants.html [Accessed 17 May 2016].CLV-Calculator.com. (2016). Customer Lifetime Value (CLV). Available from: http://

Here are some words that you may find unfamiliar from this chapter.

Assets (in accounting)

The resources controlled by an entity, resulting from past events, from which future economic benefits are expected to flow to the entity.

Demographics Statistical data relating to the population and particular groups within it (e.g., age, race, economic status, income level).

Industry Economists define an industry as a group of firms that supply a market.

www.clv-calculator.com/calculating-value-for-banks/ [Accessed 18 May 2016].

Gitman, L.J., and Zutter, C.J. (2015). Principles of Managerial Finance. Global Edition (14th ed.). Boston: Pearson.

Grant, R., M. (2013). Contemporary Strategy Analysis. (8th ed.). Chichester, UK: John Wiley & Sons Ltd.

Kotler, P., and Armstrong, G. (2010). Principles of Marketing. Cape Town: Pearson.

Small Business Finance Institute. (2016). Understanding bank loan covenants. Available from: http://businessfinancemag.com/site-files/businessfinancemag.com/files/archive/businessfinancemag.com/files/misc_file/ReceivablesExchange-Whitepaper-Bank-Loan-Covenants.pdf [Accessed 17 May 2016].

The Entrepreneur. (2016). The 15 most profitable small business industries. Available from: https://www.entrepreneur.com/slideshow/269905 [Accessed 16 May 2016].

Treasury Today. (2005). Bank credit ratings. Available from: http://treasurytoday.com/2005/11and12/bank-credit-ratings [Accessed 18 May 2016].

https://www.brandsouthafrica.com/investments-immigration/economynews/south-africa-economy-key-sectors [Accessed 10 December 2020]

https://www.oliveboard.in/blog/types-of-risks-in-banks/ [Accessed 10 December 2020]

national certificate: banking

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