Black Economic Empowerment (BEE), scorecards and “Charters” are all contentious topics in South Africa and yet with a little leap of faith, we can turn a “grudge” purchase into actual economic activity.
Let’s [a little tongue in cheek**] simplify the current approach to compliance (as I see it happening):
– We build a business but don’t want to sacrifice equity, unless it’s in the pursuit of significant new business or government work
– Training is an “easy” win, so businesses load up their training budgets with clerical / administration positions because heaven forbid that we develop critical skills capacity in a company
– We don’t REALLY want to do business (expand our supplier base) with people we don’t know and can’t still control, so we will turn our engineers, receptionist, gardener and drivers into “mini businesses” operating a “call-centre”, “garden service” and “Courier business”.
– Financial engineering, sees you converting salaries into supplier points and at the end of the financial year, you get a pat on the back from your audit committee because you’ve scraped in by spending just enough
– If you are still running shy on a scorecard basis at the end of the financial year, you put a couple of kids through school
Ultimately the spirit and intention of the legislation are broken – because it’s a grudge spend – which leads to increased friction rather than actual economic activity. It would be great if we could turn this equation around and turn “spend” into actual investment return.
Missing a trick?
I’m always surprised at the way that businesses make a lot of noise around transformation and yet they neglect to involve black-owned service providers into the financial functions of their operations.
Rightly or wrongly (would love to hear both sides of this discussion), many audit committees will not allow their businesses to engage financial services providers outside of the traditional big 4 banks / their affiliates or a handful of major asset managers / insurers.
This seems to be a bit short-sighted seeing as the financial function of your business [medical aid, pension, staff benefits, insurance, employee financially education, cash management etc.] are one of the largest costs in your business and one of the few levers which can turn “spend” into “investment return”.
Let’s do a sum***:
Using the above example of a receptionist who now runs your “call-centre” business for a contract amount of R12 500 per month, you are paying out a hard-cost of R150 000 per year and then let’s say another R5 000 for the statutory compliance of setting them up in a business, filing tax returns etc. That is a cash-out cost of R155 000 per year so that you can game supplier development points.
Let’s do it differently and take the equivalent of R2500 per month (R30 000 for the year upfront) and put it into a black-owned asset management firm which operates a money-market fund. Your management fee (cost) on that cash for the year is 0.25% – R75 excl. VAT – and you have relatively easy access to the cash. Let’s say you get a 7% return on the cash, you actually come out with about R2000 AND the supplier development point associated with the spend.
Let’s say that you had a slightly higher risk appetite and were passionate about supporting entrepreneurs. You could put the R30k into the moneymarket fund and a further R20 000 into a structured Enterprise Development fund (I’ve only come across one in SA so far) and [depending on your turnover], you would end up with more scorecard points, access to your capital (Plus an investment return) for your moneymarket investment and then an inflation beating return on your ED fund investment… oh and you would be supporting genuine entrepreneurship in South Africa.
Help me with some research
I don’t have any particular dog in this fight – so I am open to differing views – but it does surprise me that the financial services sector is:
1. The largest sector in the economy but remains hyper-concentrated despite innovative new players coming through
2. One of the few sectors where you can turn “spend” into “investment return”
… and yet there is still a lot of work to be done in terms of understanding how businesses approach the financial function of their business.
I’d love to engage with business owners, execs (HR, FD, MD, CEO) to understand how they approach this part of their business. Drop me a line in the comments below or pop me an e-mail on email@example.com with your feedback.
** A little extreme perhaps but I’m trying to highlight what we regard as “low risk”
*** Obviously the sum is impacted by turnover etc. but is used for illustrative purposes.