Business
Assessing your company’s financial risk
Published
6 years agoon
By
The Post
An entrepreneur can fund the start or growth of his business through equity or debt or through a combination of debt and equity. Each of these approaches offer some advantages and disadvantages. Choosing which source of financing to follow is one of the critical choices a business owner or manager has to make. Steve Jefferson wrote in Pacific Business News (Jefferson, 2001), “The way that money is raised can have an enormous impact on the success of a business.”
Financing the business using debt involves the business having to take a loan or loans that will have to be repaid over time, usually with interest.
The loan could be for short term (less than one year) or long term (for more than one year). The advantage of using debt financing is that it offers the company a tax advantage, since the interest paid on loans is usually tax deductible.
Debt financing also limits dilution of business ownership since lenders don’t have a claim on the ownership of the business. However, debt financing can have serious implications on the success of a business.
A new business which usually has erratic cash flows during inception and is also very vulnerable to economic turbulence might find it difficult to make regular loan repayments.
A business with a high level of debt is very risky and is of concern to potential investors and therefore will find it very difficult to raise additional capital.
The other mode of financing that business owners could adopt is equity financing which involves obtaining financing from investors in exchange for ownership of the business.
The main advantage to equity financing is that it does not burden the business with having to repay the investors. The investors however have a claim of the future profits of the business.
The other advantage is that having well renowned investors in the company raises the profile of the business. Equity financing however has its own disadvantages. The main disadvantage is that the investors become part-owners of the business, and therefore have a say in business decisions.
Most businesses tend to use a combination of debt and equity. Business leaders have to decide how much of each to use. The decision on how much of debt or equity to use depends mostly on the long-term goals of the business and how much control of the business you need.
Investors are very interested in assessing the risk of the business with respect to how it’s funded. Managers or owners of businesses should track financial risk using the same ratios that investors will use.
Investors are mostly interested in separating companies with a healthy amount of debt from those that have too much debt. Too much debt might result in a company opting for bankruptcy when it cannot service its debt.
The ratios used in assessing financial risk are referred to as coverage ratios and include ratios such as debt to equity ratio (commonly referred to as gearing ratio), interest cover, debt-service and asset coverage ratios. These ratios will be discussed below.
The debt to equity ratio assesses how much a business is being financed from debt. It is calculated by dividing debt by equity. Business experts suggest that ideally a business should use both debt and equity financing, albeit within a certain commercially acceptable ratio.
The debt to equity ratio varies depending on the type of industry and also between companies. An acceptable ratio should fall between 1:1 and 1:2. It is advisable that companies should rely more on equity financing during the early stages of their existence, since during these stages the cash flows are very irregular and as such the business may find it difficult to service the debt.
The second ratio to assess financial risk is interest coverage ratio. Interest coverage ratio is computed by dividing earnings before interest and tax by the interest expense. The main objective behind this ratio is to assess the ability of a company to pay its interest from its profits.
A ratio above one means that the company can service its interest expense. Investors will be comfortable with companies that have an interest coverage ratio of at least 1.5, any lower figure will indicate a company that is struggling to pay off its lenders.
The third ratio to use to assess risk is the debt-service coverage ratio. This ratio is better than the interest coverage ratio because businesses should be able to cover interest expense and at the same time will have to pay part of the principal amount of the loan.
The debt service coverage ratio is calculated by dividing net earnings by the total of principal repayments plus the interest expense.
If the ratio is below one then the business has negative cash flow, that is, it cannot meet its borrowing obligations as they fall due.
Investors usually use coverage ratios firstly to track changes in the company’s debt situation over time. Any continuous decline in the ratios below the acceptable figures should raise alarm as to the future survival of the business. One can also use the coverage ratios when comparing the company with its competitors.
If the coverage ratios of a company are bad compared to the competitors then it should indicate that there could be a problem. Investors will then be wary of investing in such a company.
In business the caveat is “excessive reliance on debt can wreak havoc on a business” as warned by Proverbs 22:7 which says “The rich rule over the poor, and the borrower is a slave to the lender.”
It’s therefore very important for business leaders to use the above ratios to assess whether a company will be able to pay its lenders on time.
l Stewart Jakarasi is a business and financial strategist and a lecturer in business strategy (ACCA P3), advanced performance management (P5) and entrepreneurship.
He is the Managing Consultant of Shekina Consulting (Pty) Ltd and provides advisory and guidance on leadership, strategy and execution, corporate governance, preparation of business plans, tender documents and on how to build and sustain high-performing organisations.
For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com, call on +266 58881062 or WhatsApp +266 62110062 .
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Press release for KFC Lesotho
Date: Monday, 16 December 2024
Summer, what a wonderful time of year…
When influencing gets too much
When the news cycle gets too much
When the endless queues get too much
When the shopping chaos gets too much
When the unavailable transport gets too much
When the holiday work shifts get too much
When the lawn mowing gets too much
When the loud music gets too much
When the traffic gets too much
When the relentless schedule gets too much
When the heatwaves get too much
When the weather warnings get too much
When the suntan lines get too much
When the ever-growing laundry pile gets too much
When the festivities get too much
When the 2025 university applications get too much
When the guests overstaying their welcome gets too much
When the social media mayhem gets too much
When the out of sync traffic lights get too much
When the New Year resolutions get too much
When the travel expenses get too much
When reapplying sunscreen gets too much
When the packing and unpacking gets too much
When the photo-taking gets too much
When the flies get too much
When the pool maintenance gets too much
When the fully booked airlines get too much
When the mosquito bites get too much
When the fishing trips get too much
When the baking gets too much
When the road trip stops get too much
When the sand in the car gets too much
When the picnic ants get too much
When the papa and morogo get too much
When the braai smoke gets too much
When the television shows get too much
When the homemade cooking gets too much
When the hot car seats get too much
When the outdoor markets get too much
When the air-conditioning bills get too much
When the nature hikes get too much
When the garden-watering gets too much
When the hot sidewalks get too much
When the bike rides get too much
When the late nights get too much
When the impromptu trips get too much
When the 4×4 rides get too much
When the golf games get too much
When the ice cube trays get too much
When the late-night crickets get too much
When the entertaining gets too much
When the bumpy boat rides get too much
When the paddleboarding gets too much
When the public pool crowds get too much
When the lack of parking gets too much
When the summer internships get too much
When all you need is a breather
You have made it to the end. Take a break from summer with KFC Lesotho on Saturday, 21 December, a day to pause, refresh, and savour the start of holiday mode. Swing by KFC for a taste of summer and officially step into the holidays, recharged and ready. See you there!
Discover KFC’s Summer Delights!
KFC Summer Twisters: https://www.youtube.com/watch?v=LVlAX00WROU
KFC Summer Krushers: https://www.youtube.com/watch?v=QpCn-tFYrls
KFC Summer Buckets: https://www.youtube.com/watch?v=SbiOjRR58UA
End.
About KFC Africa
KFC has been in South Africa for over 53 years and has more than 1,300 stores across the country. The first KFC restaurant in South Africa opened in 1971 in Orange Grove, Johannesburg. KFC is the leading quick-service restaurant brand in South Africa with just under a third of market share, according to Brand Image Tracker. KFC serves more than 20 million customers a month and we work hard to ensure that no matter which of our restaurants they walk into, they will get that distinctive KFC flavour and have a great experience. KFC’s Original Recipe® Chicken was first made by Colonel Harland Sanders in 1940 when he perfected his secret recipe of 11 herbs and spices at his restaurant in Kentucky. Today, KFC is the world’s most popular chicken restaurant, still preparing our chicken with the Colonel’s secret recipe to his exact standards. Every KFC restaurant follows the same global processes and procedures to ensure that our customers get great-tasting food, every time.
KFC Lesotho socials:
Instagram – @kfclesotho – https://www.instagram.com/kfclesotho/
Facebook – KFC Lesotho – https://www.facebook.com/LesothoKFC
X – @KFC_Lesotho – https://x.com/KFC_Lesotho
Business
Demystifying death benefit nomination
Published
1 month agoon
December 16, 2024By
The Post
I recently attended a trustee training session, and it sparked a thousand of opinions and emotions to fellow trustees and principal officers.
It is remarkable how people approach their pension funds with a blend of care and chaos — carefully watching contributions grow but leaving the aftermath of their departure to luck and a roomful of trustees.
With the Pension Fund Act (PFA) 2024 in place, requiring members to fill out and update death benefit nomination forms annually, one would think the process is foolproof.
Yet, we find ourselves navigating the maze of member reluctance and the emotional minefield that comes with deciding who gets what.
The PFA 2024 makes an elegant appeal to order, asking pension fund members to take charge of their legacy by nominating beneficiaries.
But, instead of pens gliding over forms, there is hesitation, resistance, and in some cases, outright abstinence.
What should be a simple administrative act seems to invoke existential dread or, worse, familial politics.
When Nomination Feels Like Negotiation
One of the most notable trends is the discomfort married members feel at the mere suggestion of allocating 50% of their death benefit to a spouse.
For clarity, the PFA does not say they must — but logic and love might.
However, these conversations often spiral into arguments over “what ifs.”
What if the marriage does not last?
What if the spouse uses the money “irresponsibly”?
What if leaving an equal share to children or a secret favourite nephew makes more sense?
These “what ifs” often lead to another troubling “what if”: what if no nomination is made at all?
Emotions run high.
Sometimes, the process of completing the form turns into a reflection of unresolved family tensions, where the form itself becomes a battlefield for hypothetical posthumous power plays.
Trustees, meanwhile, are left to pick up the pieces, making discretionary decisions that almost always leave someone unhappy.
What the Law Actually Says
Let us address the elephant in the room.
The PFA does not dictate that anyone’s spouse, child, or distant cousin must receive a cent.
The law requires you to nominate beneficiaries but leaves the who and how much entirely up to you.
And yet, myths persist, leaving members to believe they are bound to make obligatory allocations.
This misunderstanding is not just inconvenient; it is entirely unnecessary.
The beauty of the PFA lies in its simplicity: nominate someone — anyone — so your trustees don’t have to piece together your
wishes based on tea leaves, distant
relatives, or that one time you mentioned something in passing to a colleague.
The Real Cost of Silence
If leaving decisions to trustees sounds romantic — think noble strangers making wise decisions — let me assure you, it’s not.
Trustees do their best with the tools they have, but without a completed nomination form, their decisions are guided by discretion rather than your explicit intentions.
And discretion, noble as it sounds, often breeds disputes.
Disgruntled beneficiaries are not just an unfortunate byproduct of silence; they are its loudest consequence.
Without clear instructions, your death benefits might fund lawsuits instead of legacies.
Is that truly the financial wisdom you have cultivated over a lifetime of disciplined contributions?
Completing the Form: The Act of Taking Control
Filling out the nomination form isn’t just compliance; it is an act of empowerment.
It’s the financial equivalent of saying, “I trust myself to make the best decisions for my loved ones.”
It’s an opportunity to assert control over your life’s earnings and ensure they benefit those you deem most deserving.
Let us put it plainly: by completing this form, you eliminate guesswork, prevent disputes, and protect your loved ones from unnecessary turmoil.
You also spare trustees from playing Solomon with your assets — a responsibility they never asked for but inherit when you opt for avoidance.
It is not that deep!
For all the effort we pour into overthinking, let’s consider the alternative — actually completing the form.
You’ve already made harder decisions, like choosing between investment portfolios or deciding on your retirement age.
Writing down a name or two, alongside their allocations, is, comparatively, a walk in the park.
And for those of you abstaining because “it’s complicated,” let us reflect: is it more complicated than the potential legal battles, heartache, and chaos that might follow your departure?
Or are we simply procrastinating because planning for death feels uncomfortably final?
Your Legacy, Your Way
At the heart of it all, filling out the nomination form isn’t about complying with a law or appeasing trustees.
It is about ensuring your legacy aligns with your wishes.
It is about giving your loved ones clarity and peace of mind when they need it most.
So, grab that pen.
Fill in that form.
It might not be the most exciting thing you do today, but it could very well be the most meaningful.
After all, if you’ve spent years building a financial future, why let your final act of planning be defined by inaction?
Teboho Makoetlane
Business
More US funding for development projects
Published
2 months agoon
December 2, 2024By
The Post
MASERU-THOMAS Hines, the US Embassy’s interim head, has applauded Lesotho for passing the Millennium Challenge Corporation (MCC)’s scorecard, paving way for continued development funding.
The MCC is providing assistance to Lesotho to strengthen good governance, economic freedom and investments in the country, managed by the Millennium Challenge Account (MCA-Lesotho Compact II).
The MCC donated US$300 million (approximately M5.4 billion) for health and horticulture development.
For the country to qualify, it had to pass the MCC’s scorecards.
Hines told Prime Minister Sam Matekane on Tuesday at the State House that the good news is that Lesotho passed, although there are some other things the country has to improve.
For this year, the passing indicators are girls’ primary education completion rate, natural resource protection, land rights and access and fiscal policy.
Indicators that slipped below the pass rate are government effectiveness and freedom of information.
“Of MCC’s 76 scorecards, only 26 countries passed while 50 did not and the good news is that Lesotho once again passed the scorecard,” Hines said.
He said not only did Lesotho pass but it has also improved from passing 15 indicators last year to 17 of 20 indicators this year.
Hines said the accomplishment reflects Matekane and his government’s commitment to strengthening democratic governance and fostering prosperity.
“Noting the decline in control of corruption indicator, we seek avenues to do more together with Lesotho to combat corruption,” he said.
“Not only does regression in this area put Lesotho at risk of failing the scorecard we also know the corrosive impact of corruption on the economy and society.”
He said they seek to maximise the compact’s ability to ensure greater access to quality healthcare.
Matekane said the scorecards assess the government’s performance in key areas throughout the year to determine the continuing eligibility regarding MCC compact funding.
He said last year he urged the cabinet to build on the momentum from 15 out of 20 indicators.
“Let me take this opportunity to celebrate our sustained achievement of passing 17 out of 20 indicators which is a 10 percent increase from last year,” Matekane said.
“Specifically, I committed last year to ensure that Lesotho will submit data to support the assessment of girl’s primary education completion rate,” he said.
He said he was pleased with the progress overall and on gender parity in education and they aim to achieve better results next year.
In addition to this, he said, there is still a lot of work to be done, especially around trade policy, government effectiveness and particularly the freedom of information with a notable decline from 83 percent down to 43 percent.
“Our commitment to control and eliminate corruption remains steadfast. We are working tirelessly to expose corrupt activities, keeping the public sector honest and accountable,” he said.
“The commitment we have made of investing in our people has never wavered over the years and the government is also focused on improving access to quality health services to every Mosotho regardless of their background and location,” he said.
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