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Finance

UNDERSTANDING FINANCIAL LITERACY

By Rita Cool, Certified Financial Planner at Alexander Forbes

 

Financial literacy is more than understanding how to work out a percentage, it is understanding how your finances impact your life. There are four fundamental pillars to financial literacy – debt, budgeting, saving and investing – which you should understand before you can achieve financial well-being.

 

Earning – The money that you receive for doing work, passive income from investments or annuity income from other sources. You don’t only earn by selling your time or goods but by earning dividend income, interest or commission. The more you earn the more you potentially have to spend.

 

Saving – This is creating a safety net by having money available in an emergency. Mostly done in a bank account, Money Market account, Tax Free Savings Account (TFSA) or access bond where the money put aside could get a positive return, e.g. interest gained or interest saved on bond repayments. Savings should not be exposed to volatile investments as you can’t take the risk that your money is less than what you put away just when you need to use it. Ideally this could be between 3-6 months’ worth of salary, so that if something happens where you can’t earn an income, or you need money for an expensive car repair, you don’t go into debt. Saving can also be used for short term purchases, for example to replace a fridge when it breaks so you don’t have to buy on credit which saves you the interest payments. Or you can save for a short term goal like a holiday.

 

Investing – This is normally done for a longer period and the value of your investment can go up or down, depending on what you have invested in. You can invest in a company privately or invest in shares of a company. You can also make use of a product through a Linked Investment Service Provider. These are companies that invest in a range of assets on your behalf through products like unit trusts, preservation funds, Retirement Annuities or TFSA. Your retirement funds are also invested and your retirement savings are therefore affected when the financial markets go up or down.

 

Rita Cool

Spending – Everyone has expenses and has to spend some of what they earn. The trick is how you spend your money. Do you have a budget of what needs to happen with your money or do you spend everything you see in your account?

 

Borrowing – In most cases you should try to avoid borrowing money but it can also be beneficial in the correct circumstances. Borrowing money because you can get more return than the cost to borrow it is called leveraging. You can borrow money to buy a house that will increase in value over time and that gives you an asset over time. You can also borrow money to buy a company or to expand an existing one.

 

Protecting – In all cases you should protect your assets as well as income. You can take out insurance which pays in the event of your asset being stolen or damaged. You can take out life cover to give your family an income in the event of your death or take out disability cover to protect your income if you get sick and can’t work.

 

Budgeting: A budget is a list of all your fixed and flexible expenses set off against all your income to see if you have enough money to pay for everything each month. If you don’t have enough income you either have to cut your expenses or earn more. This is like splitting a cake between everyone who you need to pay. Don’t promise future cake so that eventually there is no future cake.   Fixed expenses can’t be changed – like a bond or rent, car repayments and school fees. Flexible expenses are things that can change like entertainment and food. Don’t forget haircuts, car registration fees, monthly bank charges or birthday gifts. Remember to budget to pay yourself first by saving for retirement. This should also be a fixed expense. This does not mean treating yourself with gifts but investing in your financial security and financial future.

 

Interest Rate – This is the cost of borrowing money or lending money. If you borrow money you have to pay the lender interest. This can be a fixed rate or linked to the prime rate. You also get paid an interest rate for a positive bank balance and if you invest in bonds you get a fixed interest rate, or coupon rate. You will always get less interest for money you lend than for money you borrow. So don’t sit with money in the bank while you have expensive debts. Pay off your credit card or personal loans with this money. If the money in the bank account was your safety net, your paid off credit card could be your safety net in an emergency but until then you have the benefit of not having to pay high interest rates on the outstanding credit card.

Interest is normally shown as a percentage which means “parts of a hundred”.  Cent means 100, the same as there are 100 cents in a Rand. As an example, every R100 you borrow you have to pay back another R9 on top of the R100. On a bond of R100 000 your interest each year that you owe that money is R9 000, or R750 per month. You also still have to pay back the R100 000, so the interest you pay to borrow money makes the overall purchase price of an item much more expensive.

 

Compound interest – This is the benefit of getting interest on interest or growth on growth. At the beginning it doesn’t look like your money is growing that well but over time, if you reinvest the growth your investment grows faster and faster without you having to do extra work.

 

Debt – If you have a lot of debt, the interest you pay becomes very expensive and eventually it is possible that you can’t pay off all the debt repayments. If this happens you need to work out a debt repayment plan. It is possible to consolidate your debt to reduce monthly payments, but this is only achieved because the loans are paid over a longer time and in the end you pay even more in interest. Your debt doesn’t reduce by consolidating it, it increases. If you can work out a debt repayment plan it might be possible to pay your debt sooner and therefore cost you less interest, than if you consolidated your debt.

 

Finance

OPTIMISING YOUR FINANCE THROUGH TECHNOLOGY

Covid-19 restrictions and ongoing uncertainty have prompted a fundamental switch in mindset across a multitude of different sectors. Many organisations have begun to recognise that outsourcing their finance can make them more agile and give them the competitive edge they need to compete and scale effectively in today’s market.

Mark Pullen, CEO at Xledger  explains to what extent outsourcing can boost resilience for a lockdown recovery.

 

Solving the pain points

Inefficient processes are prone to causing delays and errors which can have a huge impact on the bottom line when viewed at scale. They can also negatively impact the client experience, causing frustration with missed deadlines and mounting uncompleted tasks.

New finance technology is automating many of the daily, monotonous back office functions such as bank reconciliation and invoice entry, meaning that the nature of the work that a finance professional provides will change. This presents a huge opportunity as it gives these employees the opportunity to be involved in higher-level work. Technology can also provide a resource that gives real time insight, allowing for better strategic decision making, which is so key in the current climate.

 

Optimising your finance function

Outsourcing high-value services within the finance function can improve workflow by implementing a defined and transparent process which streamlines operations. For a finance department, this can speed up areas that require internal controls such as expense reporting and cash release, but it can also speed up the full lifecycle of a project; from time tracking and resource to accounting and billing.

There is also a cost efficiency benefit when outsourcing, as management bandwidth is effectively increased by eliminating the need to be involved in many of the day to day processes. Instead this time can be focused on other business priorities and planning for future growth.

Outsourcing accounting functions to bespoke and standardised technologies means using data led processes that can be measured, optimised and benchmarked against in-house requirements. These processes can also be undertaken remotely, boosting the resilience of your business in these uncertain times.

 

Case study box-out: RPC Tyche

RPC Tyche is a global insurance software supplier with offices in London, Paris, and the USA. Initially a division of award-winning law firm RPC, but now a stand-alone entity, RPC Tyche’s main software offerings support capital modelling, and pricing commercial insurance and reinsurance.

 

The challenge

As part of a restructuring process following the de-coupling with the law firm RPC, RPC Tyche had to separate its back-office processes. They remained under the umbrella of the law firm while the changes were taking place, so initially had some flexibility with the shared finance system, but time was running out to separate the two entities cleanly. As a stand-alone company, RPC Tyche now needed its own financial system; one that could align with its new business processes and that could be implemented quickly to deliver the organisation’s business objectives. Furthermore, they needed a new finance solution that could help them grow exponentially, facilitate a globally diverse group structure, and still maintain efficiency when operating as a small team.

Gavin Dilley, Chief Finance Officer for RPC Tyche commented, “Following an initial discussion with a third-party advisor regarding Xero and Quickbooks, we were recommended Xledger because we required a swift and scalable solution. After contacting Xledger, their tried and tested implementation methodology ultimately assured us that we would achieve the fast-paced implementation needed for our go-live objective. We also really liked that Xledger was a multi-tenanted, true cloud solution with its scalability setting it apart from the competitors.”

 

Implementation and training

Following conversations with Xledger, RPC Tyche created a project management team to keep everything on track on their side, an arrangement that Gavin emphasised “worked really well.” He said that “as a small project team, the flexibility to undergo substantial configuration during the training sessions with the Xledger consultants brought focus and enabled us to dedicate sufficient time to the system without distractions.”

Although the implementation was expected to take three months, RPC Tyche experienced hold-ups owing to the separating of back-office processes, so they were pleased when it was mutually agreed to facilitate a one-month delay.

 

Post-implementation results

“The implementation process was highly effective, and we’re very happy with the results,” said Gavin. “Since implementing the Xledger solution, we’ve been so pleased we haven’t had to dip back into the old system as the transfer of historic data has been particularly successful.” RPC Tyche had a large volume of historic data and transactions, including timesheets and work in progress reports that were all successfully migrated to Xledger during implementation. “We’re particularly happy with how easy it has been to onboard our new Finance Controller, due to flexible training and the system being so intuitive.”

Gavin added, “Since implementing Xledger, we have far greater reporting flexibility, better distribution of skills within the finance team and are naturally more self-sufficient because we can make amendments to the system without relying on the software provider.

The system is easy to use, and the purchase order functionalities, integrated workflows and automation of processes have enabled us to be highly efficient, even as a small finance team. Not to mention that the Xledger support team are incredibly responsive, so we can continually maintain productivity.”

 

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Finance

THE FUTURE OF FINANCE LIES IN THE CLOUD

Author: Chris Tredwell, Enterprise Business Development Manager,Aqilla

 

At the beginning of 2020, 87% of public sector organisations surveyed by UKCloud expressed a desire to move traditional IT environments into the cloud. But, as a result of the Covid-19 pandemic, the rate of cloud adoption in the UK has grown significantly, as many companies not already in the cloud were compelled to make the switch due to enforced remote work.

This is certainly indicative of many other industries, finance included. Pre-lockdown, the majority of finance and accounting teams still relied on on-premises software, but the move to remote-working meant many organisations had to quickly reconsider their technology needs and move some or all of their IT requirements to cloud-based platforms.

But, in a recent survey by GrowCFO – an independent portal for finance leaders to network, learn and collaborate – it was found that there is confusion around what actually equates to a true cloud finance platform. This was apparent given some respondents replied with ‘cloud’ to known on-premises solutions, suggesting the difference between cloud-based and ‘on-premises with remote access’ is not fully understood.

This is an important point because it has the potential to influence the technology choices made by organisations across the sector. In short, traditional on-premises financial software resides on IT systems owned by the user organisation, typically on hardware hosted within their building. After purchasing and installing the software, they maintain, secure, and manage it themselves (or with the help of a specialist third party IT support business). Many of these systems also offer the option of connecting remotely, with users accessing software and data via a connection to their office-based network.

Conversely, cloud software is almost entirely outsourced and delivered via a web browser or app as a service to each user, hence the description ‘Software-as-a-Service’ (SaaS). The software resides with the service provider who is also responsible for reliability, performance, the availability of enhancements and updates, as well as the security of their service or application. The location of the user is largely irrelevant – as long as they have a good, secure internet connection, a suitable laptop or tablet and a browser, they can access the service in exactly the same way as if they were in the office.

Chris Tredwell

One of the most immediate changes organisations notice when moving from on-premises technology to the cloud is it removes the need for in-house IT personnel or external specialists to manage and maintain the technology. For many smaller organisations, it liberates the individual who has been given the task of ‘looking after’ the on-premises tech, even though it usually isn’t their specialism or even in their job description.

But that’s just the start. The massive success of the cloud-based, ‘-as-a-Service’ technology industry is predicated on a range of key developments over traditional on-premises, or ‘legacy’ software.

 

A Formula for Finance

Often of particular interest to finance and accounting professionals are pricing and payment terms that accompany today’s cloud SaaS options. Cloud-based software typically offers the convenience of a monthly pay-as-you-go model, instead of investing significant up front sums in one-off software purchases. This also saves money on the server hardware that has previously sat in the office, which may no longer be needed at all. Also included in cloud pricing arrangements should be details which clearly set out the type of service and support included in the cost. Done well, cloud-based customer support and service can deliver an exceptional experience where the provider effectively works as an extension of their in-house team.

The best cloud software providers place huge emphasis on security, focusing on data protection, backup services and their ability to deal with common security issues, such as ransomware. This also extends to compliance, and in the finance context, specialised compliance capabilities offered by many cloud software providers can be of particular benefit. Even for the most niche requirements, there is often a software provider out there whose technology has been written to meet compliance rules, often saving users considerable time and effort.

And then there’s the key issue of functionality and performance. Today’s cloud-based finance software market offers a wide range of options from simple entry-level tools to powerful applications designed to meet the needs of even the biggest and most complex finance departments. For organisations considering cloud, it’s important to assess the options available and choose a provider that most closely matches their individual needs.

For many finance and accounting organisations and their teams, the requirements of lockdown and transition to home working were made possible by cloud-based software solutions. In doing so, they have gained valuable insight into the range of services available, their potential benefits and how technology can become much more than just a labour-saving tool, but also a means to enhance their all round business capabilities.

 

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