Every business needs four types of people:

· Customers to make purchases.

· Suppliers to provide goods and services.

· Employees to do the work.

· Owners to invest capital.

Customers want the best value at the lowest price. Suppliers and employees want the highest compensation for the lowest cost. And owners want the best return on their investment.

Sustainability hinges on maintaining a satisfactory trade-off between these competing needs, but it's impossible to achieve a perfect balance. Some will enjoy higher prioritisation than others.

So who comes first?

I suspect most entrepreneurs would argue that their customers come first because, without them, there would be no revenue and, thus, no business. Some might opt for their employees instead, claiming that you can't sustain a good client base without a good workforce.

Personally, I believe that owners always come first, but no-one ever admits to that because it's not politically correct. We've been socialised into believing (or at least claiming to believe) that “the customer is king” and “our people are our most important asset”. But when times are tough (cf. COVID), unprofitable customers are ditched and non-critical employees are retrenched. Owners are always first in and last out.

The tendency for owners to neglect their own needs is compounded by the media's schizophrenic presentation of entrepreneurship: you're either a selfless innovator striving to make the world a better place, or a corporate sociopath who'll stop at nothing to maximise personal gain.

There's no rational (or relatable) middle ground. No-one celebrates the sensible owners who look after their customers, employees, and suppliers, while also protecting their own financial interests. We're too distracted by Elon Musk memes and Bill Gates conspiracy theories.

As an owner, you assume all of the risk. Yet most of the owners I know believe that they're doing the right thing by putting everyone else's needs ahead of their own. They usually only pay attention to their own interests when their business is in dire straits, and by then it's often too late.

Look after yourself while you're looking after your business. No-one else is going to do it for you.

Proposed amendments to the Employment Equity Act include the prohibition of non-compliant companies from doing business with state entities. Of particular interest is that the compliance requirements for small enterprises (i.e. those employing fewer than 50 people) are lighter than those for large companies.

Unsurprisingly the Department of Labour has framed this as a victory for SMEs, but I'd argue it's yet another administrative incentive for staying small instead of scaling up. The Broad-Based Black Economic Empowerment framework, Labour Relations Act, and Small Business Corporation tax structure are just some of the other regulatory initiatives that directly encourage entrepreneurs to dial down their ambition.

South Africa's entrepreneurial environment could not be more schizophrenic. On the one hand, a vast network of government agencies, incubators, and enterprise development programs relentlessly encourage people to start their own business. But those who do, and who survive for long enough, quickly discover that there is an exponential red tape burden beyond a tipping point.

None of this makes any sense.

The cost of starting a business (i.e. actual cash outflows as well as lost opportunity costs and expenditure in kind) is very high, yet the survival rate is very low. So why are wide-eyed entrepreneurs, ill-equipped for the reality of running a business, herded lemming-like to the precipice of economic disaster?

Every other medium of economic participation has an exhaustive framework to protect new entrants from bad actors as well as their own naiveté. Job-seekers are protected by labour laws. Borrowers are protected by the National Credit Act. Investors are protected by a litany of financial regulations and agencies.

There is no safety net for entrepreneurs. Instead, those who are brave, stubborn, smart or lucky enough to beat the odds are rewarded with an avalanche of red tape that punishes them for growing their business, creating jobs and contributing to socio-economic development.

Most entrepreneurs rely on organic growth by default. Building a market footprint from scratch has its merits, but it's often a slow and speculative approach. The alternative is inorganic growth: partner with other companies that already have the clients, product lines, systems, talent, and other assets that you seek.

Mergers and acquisitions are two of the most common options for joining forces. So which is right for you?

Acquisitions can be done on a share or asset basis. The former typically involves the transfer of all assets and liabilities, while the latter is limited to specific resources and obligations (which may require third party consent, such as creditors for encumbered assets). Their tax implications can vary considerably. For example, securities transfer tax will be levied on the sale of shares, while the sale of assets may incur VAT.

Mergers are often assumed to involve two companies blending together into a new entity with shared equity, but there are actually a variety of possibilities. One of the merging entities can subsume the other (instead of both amalgamating into a third company), and the consideration for the deal needn't involve shares (cash is an obvious alternative).

One of the biggest advantages that mergers enjoy over acquisitions is the immediate and automatic transfer of many assets by operation of law (which cuts out a lot of painstaking admin). They can also benefit from  tax exemptions, subject to how consideration for the deal is structured. On the downside, they're typically "warts and all" transactions, so thorough due diligence is critical.

Ultimately, the choice of deal structure should be informed by what you're trying to achieve. If speed and simplicity are of essence, and you're certain the fit is right, then a merger will likely be preferable. On the other hand, if you're only interested in parts of a company instead of the whole, then an asset acquisition will probably make more sense.

You've finally reached the Promised Land of entrepreneurship: a business that is small enough to manage without too many headaches, but large enough to churn out healthy profits like clockwork. So what's the best way to extract all of that surplus cash and reward yourself for years of blood, sweat and tears?

There are three obvious options: remuneration, dividends, and shareholder loans. Many owners will be primarily concerned with their respective tax implications, which will vary depending on your particular circumstances (e.g. whether your business qualifies for the Small Business Corporation tax structure or not).

As a rough rule of thumb, increasing your salary will probably be more tax efficient than paying a dividend until you approach the highest income tax bracket (i.e. 45%). Yes, the dividends tax rate is only 20%, but they're paid from after-tax profits, so the effective tax rate can actually end up over 42%.

Increasing your remuneration has the added benefit of reducing your company's taxable income, but bear in mind that SARS can disallow salary deductions if they're deemed excessive relative to market benchmarks.

Loans are usually not a good idea. Interest-free or low-interest loans are deemed to be dividends and will be taxed accordingly. However, unlike actual dividends, they'll continue to be taxed as deemed dividends until they're repaid. Loans can also expose your personal assets to risk in the event of business creditor claims.

Tax aside, there are some other important factors to consider. Increasing your remuneration has the advantage of putting cash in your pocket immediately. Dividends, by contrast, tend to be declared at the end of the financial year, so you'll have to wait for your payout.

That said, the cash flow advantage of a salary increase can be a double-edged sword. We tend to adjust our lifestyle according to our earnings, so salary increases often get treated as disposable income instead of invested for long-term financial freedom. Dividends can just as easily be splurged on a new car or overseas holiday, but the delayed gratification fosters sobriety.

Finally, dividends don’t impact the value of your business in the same way that salaries do. As an expense, salaries reduce your profitability, whereas dividends come out of your retained earnings. If your salary goes up, then your profits and retained earnings will come down, eroding business value in the process.

Look at it from an investor’s perspective: would you rather buy a business that generates surplus earnings for its owner, or one that operates on thin profit margins due to bloated management salaries?

It's natural to equate success with outcomes: we celebrate when our team scores a goal, when we receive a diploma at the end of our studies, and when our bank balance gets bigger.

Obviously outputs matter, but fixating on them distracts us from the key inputs that influence where we end up. This is particularly relevant in business, where obsessing over the numbers on a financial statement can blind us to how those numbers got there in the first place.

You can't scale a thriving business (or turn around a hot mess) if you don't understand the root causes. This ought to be self-evident, yet many business owners only track lagging indicators of success (e.g. sales, revenue, net profit) with scant regard for the leading ones.

One simple tactic for getting to the bottom of your success (or lack thereof) is by asking a series of nested "why" questions. As you peel away the layers, you'll likely uncover hidden catalysts shrouded by blind spots.

For example, imagine a business grows its revenue from R1 million to R10 million over the course of several months. What's responsible for this success?

Let's start with the first and most obvious "why": why did their revenue increase so sharply? Perhaps the primary cause was the launch of a new product line that their existing customers snapped up like hot cakes.

Why did they introduce this new product line? Let's assume the sales manager insisted that they do so.

Why was the sales manager so insistent? Presumably he believed that their customers would love it.

Why did he believe this? Maybe he had a hunch based on his market experience, which was validated when someone inquired about the product on the company's Facebook page and a few dozen people seconded the request shortly afterwards.

The obvious conclusion is that customer feedback is a leading indicator for sales. Hardly ground-breaking insight, but it has profound implications if this fictional business (like many actual companies) allocates substantially more time, effort, money and other resources to growing sales (a lagging indicator) than soliciting customer feedback (a key leading indicator).

It usually only takes four or five "why" questions to uncover a key leading indicator. When you do, treat it with the same reverence as your output priorities: set targets, plan how to achieve them, and track your progress.

The Employment Tax Incentive is a boon for entrepreneurs who want to hire and develop talented junior employees. However, a recent SARS private ruling highlights that there are limits to how far business owners can take advantage of the ETI.

The ruling concerns a company that enrolled student employees in an external training program managed by a non-profit organisation. The students received a tablet, data and monthly cash stipend as incentives for persevering with their training.

However, while the students were employed for a year, they had to forfeit their salary for the duration of the training program with no guarantee that their employment would be extended thereafter. Furthermore, instead of performing any actual work, their only duty was to attend the virtual training courses.

SARS had to determine whether these students qualified as employees for the purpose of the ETI. According to the ETI Act, an "employee" is any natural person (excluding independent contractors) who:

1. Works directly for someone; and

2. Either receives, or is entitled to receive, remuneration from their employer.

SARS concluded that the students did not satisfy these requirements and, therefore, that the company was not entitled to claim from the ETI.

While this is a private binding ruling and limited to the company in question, it does set a precedent for other entrepreneurs. The ETI is a great opportunity for SMEs to grow their teams cost-efficiently, but creative schemes that border on exploitation won't cut the mustard.

Most entrepreneurs know that profitability matters, but there's more to your bottom line than meets the eye.

Your accounting profit reflects how well you're pricing your goods or services and controlling your costs. It's a measure of business sustainability as well as management competence.

However, accounting profit is strictly limited to business line items and excludes an owner's investment circumstances. Therefore, it's a reasonable indicator of business performance, but not a reliable measure of investment performance.

Your economic profit, on the other hand, includes your required rate of return (i.e. the return that you need to justify your investment risk). Many entrepreneurs under-estimate their required rate of return, and it's not unusual for an owner-run business to make an accounting profit but an economic loss.

For example, consider a business that makes a net profit of R1 million and pays a dividend of R500,000. Many owners would be delighted with these results.

But what if you had to invest 10 years and R10 million to get your business to this point? If you had allocated that same capital over the same timeframe somewhere else, you could have enjoyed a better return with less risk (e.g. you would have more than tripled your capital by simply investing in the S&P 500).

The distinction between accounting profit and economic profit is critical, because your business isn't just a place to work. It's also an asset that can (and should) create wealth for you.

Accounting profit tells you whether your business is making enough money for itself. Economic profit tells you whether it's making enough money for you.

Collecting overdue accounts isn't easy at the best of times, and these clearly aren't the best of times.

There are many strategies for converting receivables into cash more quickly, but one that often goes overlooked is making payment as easy as possible for your customers. Convoluted account statements and obscure settlement instructions are unnecessary obstacles that can delay settlement.

Streamlining your account administration and customer payment process is a good first step, but don't limit yourself to obvious bottlenecks. For example, researchers at Seattle University, Rutgers University-Camden, and Microsoft found that rounding down overdue amounts can improve payment rates by almost 10%.

Why?

Rounded numbers are easier to recall and process, which are the first steps towards making payment. Amounts ending in 5 or 0 are ideal, because we have five fingers on each hand and ten in total. Thus, someone is more likely to remember and settle an outstanding amount of R995.00 than R996.27.

Naturally this doesn't guarantee payment, and it probably won't make any difference to willful delinquents. However, for everyone else, even a small adjustment of just a few cents can get your account off the back-burner and into your bank account.

Many moons ago I worked with a small business that was stagnating. Operating costs were rising more rapidly than sales, leaving only one logical outcome if something didn't change soon.

During the course of my analysis I discovered that there were two dozen employees, yet only one of them served in any marketing or sales capacity. No wonder the business was floundering!

This isn't an isolated anecdote. In my experience, the vast majority of business owners simply don't allocate enough resources to growth. They plan ambitiously, but manage conservatively.

In an effort to separate the walk from the talk, I've coined a completely made-up metric: the Growth Resource Ratio. Simply divide the resources (i.e. time or money) that you allocate to growth (i.e. any activity that has a direct impact on turnover) by your total resources.

The typical Growth Resource Ratio for most post-startup SMEs is less than 10%. That's pretty awful, assuming you're serious about scaling your business.

So why is it so low?

First, most entrepreneurs have no clue how to grow a business. They know how to install IT networks, repair cars, or bake confectionery, but building a business that can profitably render those goods or services without their constant involvement demands a completely different set of skills.

Second, many of them lose their way. It's easy to prioritise growth when your business is small and simple, because there's nothing else competing for your attention. It's a lot harder to maintain the same vigilance when you have people to lead, suppliers to coordinate, cash flow to manage, admin to handle, etc.

Finally, most owners aren't serious about scaling their business. They're content with modest growth at a comfortable pace that doesn't require a disproportionately larger share of their resources.

So I'm curious: what is your Growth Resource Ratio? And how well does it match your ambition?

Few topics are more provocative among investors than Bitcoin.

Advocates highlight its history of outsized year-on-year returns and argue that, much like gold, the limited supply serves as a hedge against inflation. Critics point to its volatility, absent cash flows, abundant scams, and lack of any ubiquitous real world application at scale.

Clearly much hinges on your particular investment philosophy and objectives. However, from a strictly financial perspective, an investment ought to yield an income stream, capital appreciation, or both. If it can't, then one has to question whether it can be considered an investment in the first place.

So how does your business compare?

Most SMEs don't generate ownership income streams. Any compensation their owners receive is contingent on their employment, so they really own a job instead of a business.

Furthermore, most SMEs don't appreciate in value. Even those generating accounting profits usually incur economic losses because of their high risk profile (i.e. they're not profitable enough to compensate their owners for their investment risk).

Of course, speculation is inherent to any investment. Just because your business hasn't generated any ownership income or appreciated in value doesn't mean that it can't do so in the future. Nonetheless, at some point it either has to make good on its investment potential, or languish as a place to work.

As for Bitcoin, its price may have skyrocketed exponentially, but it's a lot harder to quantify whether its value has appreciated. Regardless, it's stuck around for more than a decade. That's longer than most SMEs.

What do you want to achieve with your business?

Not what you tell your friends, or your accountant, or your employees, or even your significant other.

Deep down, where do you want to be? What price will you pay to get there? And how far will you settle?

There are only three types of entrepreneurs:

The survivalists battling to get through today. They tell themselves that they'll plan for the future as soon as the present settles down. Some of them mean it, but many are so addicted to the chaos and crisis management that they never escape the storm.

The pragmatists building a better tomorrow. Occasionally they're seized by flights of hyper-ambitious fantasy, but ultimately they want a lifestyle business: one that is profitable enough to look after their family and fund their financial freedom, but small enough to manage without too many headaches.

The contrarians obsessed with legacy. Their singular concern is impact at scale. They can never get big enough fast enough, and are frequently incensed by the sanguine pace of everyone else around them.

When you're all alone and no-one is watching, which one are you?

It's not easy being an authentic entrepreneur when the media is saturated with outliers. Most of us will never disrupt our industry, hammer out billion dollar deals, list on the stock exchange, or exit for a fortune.

That's OK.

What you choose is less important than the authenticity of your conviction.

Whether you're starting out or scaling up, time will always be your biggest constraint. There's never enough time to do everything, and growth introduces new responsibilities that further erode our finite capacity.

There are plenty of productivity "hacks" for short-circuiting habitual profligacy, but there's clearly an upper limit on how much additional time we can wring from an average day.

Moreover, Parkinson's Law advocates that work expands to fill the time allotted, so there's a good chance that efficiencies in one domain will simply lead to inefficiencies somewhere else.

Since (significantly) more time is wishful thinking,  optimising how we utilise our capacity offers more productivity potential than scavenging a few extra minutes here or there.

To-do lists (and similar tools) are a logical starting point because the benefits of planning our work in advance ought to be self-evident. However, the problem with to-do lists is that they're prone to bloat: it's unlikely that you're going to get everything done, so the incomplete tasks inevitably roll over to the following day and get compounded by the perpetual influx of new assignments.

Before long, everything important is also urgent, and everything urgent feels important.

The antidote is a to-don't list, which is exactly what it sounds like. Write down the stuff that you definitely won't do today. Not only is it incredibly liberating to take back control and cull the stuff that you know you're not going to get around to doing, it also helps to bring the really important stuff into sharp relief.

Much like completing a complex puzzle, it's a lot easier to begin by setting aside most of the pieces before starting with the corners and edges.

COVID has forced many business owners and their employees to work from home on a partial or full time basis. If you've been similarly affected, don't forget to claim any eligible home office expenses when submitting your income tax return for the 2021 year of assessment.

To qualify as tax deductible, home office expenditure must satisfy both a positive and negative test: the positive test (i.e. permissible deductions) falls under section 11 of the Income Tax Act, while the negative test (i.e. restrictions and prohibitions) is covered under section 23.

As far as section 11 is concerned, any non-capital expenses and losses incurred while generating an income may be tax deductible. Common home office expenditure that may qualify include rates and taxes, office equipment wear-and-tear, phone and internet, as well as repairs and maintenance.

In terms of section 23, deductions aren't permissible unless they involve a section of your home that:

1. You're occupying for the purposes of trade.

"Trade" includes "every profession, trade, business, employment, calling, occupation or venture", so any work you're performing from home in the ordinary course of your business ought to qualify.

2. You've specifically equipped for the purposes of trade.

This will obviously vary from one profession to the next, but a workstation with a computer will probably be sufficient for most deskbound owner-managers.

3. You're using regularly and exclusively for the purposes of trade.

"Regularly" is open to interpretation, but occasional work from home (e.g. every now and then over the weekend) probably won't cut it. "Exclusively" is far less ambiguous: your home office space can't be used for anything other than work, and will probably need to be a separate room.

Note that qualifying expenses may also be subject to apportionment using the ratio between the space dedicated to work and the total premises. This calculation must be based on the entire area of all buildings (not just the main residence) as well as exact floor area measurements (i.e. don't rely on estimates).

As always, check with your accountant for any additional provisions that may affect your particular circumstances. For example, section 23 also differentiates between variable and fixed income-earners, so your compensation structure may also impact which home office expenses you can claim.

The unique value that you create for your market, and the distinct brand that you build around it, doesn't exist anywhere else. These wheels need to be invented.

On the other hand, it's unlikely that your administrative systems and management controls warrant extreme divergence from established standards. Acquiring these ubiquitous wheels from someone who has already invented them will probably be good enough.

Many entrepreneurs are tempted to build every facet of their business from scratch. This is both unnecessary and risky, because it's impossible to predict with certainty how long it will take or how much it will cost. It also delays growth, because scaling without consistent and sustainable benchmarks is a gamble.

Growing a business may feel like invention, but a lot of it turns out to be unnecessary reinvention.

The alternative is acquisition: get what you need from someone who already has it.

Valuing your business can be a lot of fun when negotiating an equity investment to springboard growth or structuring a lucrative exit strategy that will assure your financial freedom. However, there are many scenarios (e.g. forced buyouts due to owner deadlocks) where getting your business valued may be decidedly less glamorous but no less necessary.

Many conventional valuation practices are based on large companies, so applying them to a small enterprise is challenging. SMEs are risky, volatile and unpredictable. Their valuation can vary by an order of magnitude depending on your methodology: valuations based on historical performance tend to be overly-conservative, while those based on future potential risk excessive optimism.

So what's the solution?

#1 Clarify the context

The purpose of a valuation ought to inform its calculation. Equity investors are motivated by a share of the upside, so it's reasonable to prioritise future returns. By contrast, if a disgruntled partner wants to sever ties as quickly as possible, it makes more sense to focus on current financial position and recent trends.

#2 Normalise the data

SMEs tend to be highly dependent on owners who don't come from strong management backgrounds, which is reflected in their financials. Irregular income and discretionary expenditure are common, particularly when personal and business affairs get conflated. Adjustments must be made to account for these otherwise any valuation will be biased towards the owners' personal idiosyncrasies.

#3 Establish a range

Relying on a single number is foolhardy because every valuation methodology has its own pros and cons. Performing multiple valuations will confirm over-arching trends and provide a range for framing negotiations. For example, if liquidation, net asset and normalised EBITDA valuations all yield a range of R1.2m - R2.4m, then it's hard to defend a value of R200k or R20m.