That is the view of Hugh Hacking, Head of Retirement Fund Solutions at Old Mutual Corporate, who says that he is seeing an improvement in awareness levels among companies regarding the importance of retirement savings and other employee benefits.

More and more, companies are acknowledging that employee benefit programmes are a key tool to increase the savings rate of the working population.

“Employee benefit programmes create the structured mechanism through which employees will save regularly for the future and thereby become more financially secure,” he says.

This renewed enthusiasm among local companies for providing employee benefits is being tempered by affordability issues in the wake of the global financial crisis and concerns around the economic outlook in South Africa. “As a result, it is crucial for employers to look at employee benefits in the context of what is ideal, but realise that they do not need to implement everything at once.”

According to Hacking, an ideal employee benefit programme could include a mixture of retirement savings, group life insurance, medical aid, funeral and disability benefits, but that the importance of these elements vary from company to company and from employee to employee.”

When structuring an employee benefits package, it is important for companies to understand the core needs and priorities of their specific employees.

“For example, younger employees who don’t yet have families may not place much value on group life cover. They are also likely to feel that their salary, not their retirement savings, is their primary wealth generator. In these instances, employers need to have a strategy in place to communicate the benefits of long term saving and investing.

“While employers have a responsibility to ensure the long term financial wellness of their employees, there are also self-serving reasons for companies to implement an effective employee benefits scheme.”

Old Mutual research has shown a direct link between people who are members of retirement funds and higher levels of confidence in their financial planning. “Simply the act of putting an employee benefit programme in place has a positive impact on the workplace. Happy employees tend to be more productive and more incentivised to work for an employer when they know that the company has benefits in place for them and their dependants,” says Hacking.

In addition to these advantages, well-structured employee benefits can help small businesses avoid disaster in the event that one of their employees becomes disabled or dies.

“Many small businesses insure their equipment but neglect to consider the financial consequences of a staff member becoming too ill to work or dying”

According to Hacking, the savings benefit of an employee benefit programme is not only for retirement. “Employee benefit programmes create long term wealth and financial wellbeing for employees. The savings they generate can protect them from financial shocks such as job loss and create wealth that, importantly, can be passed on to future generations. It is crucial that South African employers get on board with this to address the savings crisis in the country,” he says.

Van Deventer says that the increase in transport and electricity costs and the consequent knock-on effect this will have on the price of most goods and services are especially worrying in light of South Africa’s low savings rate. “South Africa already has an extremely low savings rate, with savings that constitute only 20% of the country’s GDP. When compared to other emerging economies such as China and Malaysia, South Africa scores extremely low on domestic savings levels.

“In addition, it is estimated that a frightening 94% of working South Africans do not save enough for retirement and therefore will face financial difficulties in their golden years.”

He says that on top of the day-to-day savings, working consumers should be saving about 15% of their salaries towards retirement. “This is becoming increasingly difficult to do with the high cost of living.”

He says that consumers will need to take extra precaution to ensure that they have set budgets in place and stick to a financial plan when it comes to savings strategies. “Effective planning will ensure that consumers can retire comfortably and afford necessities such as housing, food, medical expenses and even college or university fees for their children.”

Van Deventer advises that consumers tighten their belts and make use of financial planning and budgeting in light of these increased every day costs. “An effective budgeting method is to analyse monthly variable expenses such as petrol, clothing, groceries, cash withdrawals and rest and recreation items, as these items make the most difference to wealth building strategies. These expenses need to be separated into need-driven and want-driven costs, which consumers should be able to cut down on. By cutting down radically on want-driven expenses consumers can effectively find additional funds for savings purposes. As a guideline, total savings should come to about 20% of net salary.”

The warning comes from Deborah Solomon, a registered debt counsellor and founder of The Debt Counselling Industry portal, theDCI.co.za. The website, the only one of its kind in South Africa, is rapidly becoming the information source of choice for heavily indebted consumers looking for a way out of the debt trap.

Solomon recently warned that the credit crisis is not receding at household level and rising fuel and food bills are driving more consumers into debt. Now she says a new crisis could be on the way as the banks quietly build bigger books of unsecured consumer debt.

“Big growth in unsecured lending is a growing concern among debt counselling professionals,” says Solomon.

Solomon says rising unsecured lending volumes draw only muted comments and little action from the financial authorities, though they acknowledge that unsecured lending to households is growing ‘at rates of around 30%’.

A more energetic response is required.

She warns: “Recourse to this type of credit could be a new sign of instability. Reckless lending is not a thing of the past. It still happens and wrecks countless lives. It is almost impossible to take a reckless lending case to court because of the costs involved; costs over-indebted consumers simply cannot afford.”

Deborah Solomon is close to credit trends through her work as a registered debt counsellor and from consumer feedback on theDCI debt counselling portal. Personal feedback indicates some banks are granting unsecured loans of up to R180 000. Interest rates at some lenders top 45%.

Unlike asset-based finance on a car or mortgage advances backed by physical property, a consumer does not put up assets or collateral to qualify for an unsecured bank loan.

Solomon cautions: “It is assumed these loans are only advanced to those with no bad debt history and a good credit record. This is the perception, not the reality. People who already have financial problems are also offered these loans and feel they have no choice but to take them.”

She says the banks are driving the spike in unsecured lending and it “cannot simply be ascribed to newcomers to the banking sector like students and those entering better-paid employment”.

Desperate consumers ask very few questions and their psyche in this state only focuses on the short-term solution, not realising that this very solution has just put the nail into their coffins financially. There is no quick fix and consumers with no homes who take out multiple loans within a one-year period are rolling money, postponing the inevitable.

Solomon adds: “In fact, the banks are still competing aggressively for growth in the unsecured lending category and are not above sugar-coating the truth about how tough it can be to meet your repayments.

“A pattern is emerging. The borrower obtains a bond, then revolving credit and credit cards, then progresses as a last resort to a personal loan at high interest rates. It’s a credit crisis waiting to happen. – and no one warned you it was coming.”

Silke covered many topics and subjects – but his views on BRICS bear second and third thought.

At the end of last year I was not overly favourable of the entire BRICS terminology and grouping – as they are made of just such different economies. There are others too who have been sceptical on South Africa’s inclusion in the BRICS – we just look a minnow on numbers comparisons.

Silke has a different view – BRICS is good for SA – we can learn from the other BRICS. From China we can learn how to discard completely outdated ideology and from India the focus on education and technology. SA spent a long time courting the BRICS and inclusion in this new group of power is possibly the legacy the current government will leave. It’s not a bad legacy – providing we use it well and do learn from what others have been through.

South Africa has done so much right – on many big issues – but the right is accompanied by the incredibly frustrating – labour market and labour law impasse, lack of job creation, poor state of education and healthcare and the latest to show off inconsistency – the etoll saga.

If the annual Budget in February was a highlight for the country this year the etolls have been a lowlight and as we move into strike season this could further dampen aspirations. This is what you see of you look at SA in detail and close up. When you look from afar the big picture shows many more rights.

It is impossible to not look at both pictures – but of the big picture is BRICS we need to make the best use of it.

Concerns about the strength of the global recovery have dominated markets over the past year, with renewed worries about the sustainability of the US economic recovery and the sensitivity of China to a European recession leaving investors uncertain. However, for the 12 months ended 31 March 2012, all asset classes – including equities – outperformed cash, which highlights the importance to sticking to a well-diversified investment strategy and not being swayed by headlines.

Global equity markets extended the rally started in the fourth quarter of 2011 into the first quarter of 2012. In local currency terms, the MSCI All Country Index was up 11.12% for the quarter (and 6.24% in rands), while the SWIX Index rallied 7.49% (also in rands). Over twelve months, the MSCI All Country Index made just 0.74% when measured in local currency (but 12.64% when measured against a depreciating rand), compared to the 11.62% return of the SWIX.

The chart below describes the fortunes of several asset classes over the past 12 months. (For ease of comparison, all returns are shown in South African rands.)

ALSI performance – 1 January to 22 September 2011

Most of the quarter’s equity market gains took place in the month of January, where markets responded positively to better-than-expected economic news out of the US and China, as well as to some progress on a resolution to the Greek debt crisis. Once again, however, the uncertainty playing itself out in the global arena resulted in renewed equity market weakness during the months of February and March.

Nevertheless, those investors who were put off by seemingly erratic market behaviour and who cautiously remained invested in cash would have had a significant opportunity cost.

Commentators have referred to this schizophrenic behaviour of the market over the past year as risk-on/ risk-off trade. We can track this so-called “risk-on/ risk-off trade” by noting whether resource shares are outperforming (risk-on) or underperforming (risk-off) the general market.

As the chart below shows, resource shares have significantly underperformed the general market over the past 12 months (and by almost 50% since the onset of the financial crisis in 2008), despite two periods of positive performance over this time (shown by the upward sloping arrows in September and October last year, and January this year).

ALSI performance – 1 January to 22 September 2011

It is, of course, extremely difficult to time the purchase of resource shares, just as it difficult to time the entry or exit point from cash. Investors should therefore remain cautious of exposing their portfolios to a prominent macro-economic view, giving the difficulty of consistently getting this right.

A well-diversified, multi-managed process should reduce the risk of getting entry points into asset classes or sectors incorrect, and help to mitigate periods of underperformance. Multi managers are deliberate about not trying to time turning points in the interest rate cycle or basing investment decisions on when economic conditions will improve. Rather, they expect their appointed managers to follow their own investment processes and not to react to the latest headlines or news. The result should be a combination of managers that follow distinct processes, and more consistent risk-adjusted returns.

“With investors’ focus currently on the mess in Europe and the negative knock-on effect of this situation on economies across the globe, investors are obviously asking whether we are once again entering a bear market,” says Paul Stewart, head of asset management at Grindrod Asset Management.

The below Chart  (top graph) shows the trailing price-earnings (PE) ratio of the FTSE/JSE All Share Index (ALSI) at the start of all bear markets (defined as a drop of 20% or more) since 1960. According to Stewart, the average PE ratio of the ALSI at the start of a bear market has been 15,6 times earnings (red line).

“Since 1960 there have been six bear markets where the ALSI traded below this average PE,” Stewart points out. “Furthermore, there have been only two bear markets (orange bars) since 1960 when the PE ratio at the start of the bear market was below the long-term average PE of 11,9.”

The bottom graph of Chart A shows the percentage decline of the ALSI during these bear markets. For the two bear markets (orange bars) that began when the ALSI was trading below the long-term average of 11,9 times earnings, the average decline was 34,3%.

“While this is below the historical average decline of 38,6%, the sixth most severe bear market since 1960 began in October 1980 when the ALSI traded at a mere 9,1 times earnings,” says Stewart. “That bear market lasted a full 24 months and saw a decline of 38,7%.”

“While the ALSI PE ratio helps us to compare the market’s valuation over different time periods, it also helps to compare the market’s historical valuation relative to alternative assets,” says Stewart. The Chart below (top graph) shows the earnings yield of the ALSI relative to the 10-year yield on the BEASSA All Bond Index (ALBI) on the specific bear market starting dates.

“As of 30 April 2012, the earnings yield of the ALSI at 7,7% was slightly below the yield on the 10-year treasury of 7,8% (relatively speaking at 0,99 on the chart). Since 1965, the date from which the yield data for the ALBI are available, there has only been one bear market that began with a ratio higher than 1,” says Stewart.

“Historical valuations of the equity market at the start of bear markets since 1960 show that although bear markets are less likely to occur when valuations are at low levels, they are still possible. While valuations remain attractive, there are many other potential variables investors need to take into account in their investment decisions.”

Stewart says that while an underweight position in equities seems to be the right strategy for now, with uncertainty and volatility likely to continue for some time to come, he believes equities still have the best return potential over the long term compared to other asset classes such as cash and bonds. “Long-term investors who can tolerate the volatility should therefore not abandon their equity positions,” he says.

Greece, which continues to grapple with its uncertain economic future in the Eurozone, is exerting undue influence on financial markets. Despite its relatively small economy, the country is boxing above its weight as the world waits for some kind of resolution to the crisis, and frets with the ‘who will be next’ question.

As we have come to expect, the rand – as one of the most liquid emerging market currencies in the world – has not escaped unscathed. It is back to the highs of last December, unwinding all the gains it has made on the back of relatively good economic news this year. Over the last few days, the rand ranks second only to Poland as the worst performing emerging market currency. Over the slightly longer term, however, the rand has benefited from SA’s inclusion in the Citi World Government Bond Index, with deprecation close to that of the Australian dollar and a better performance than its Indian, Mexican, New Zealand, Brazilian and Polish counterparts.

Broadly, therefore, the rand is performing in line with commodity-producing countries, which is expected considering that gold and commodity prices have fallen quite aggressively over this period.

Inflation and interest rates outlook

As the rand nears the R8.50 level we expect investors to see value and we should see some stability returning. Of course, a spike in the currency remains a possibility for as long as European risks prevail. However, in our view, a rand trading at around R8.50 remains on the cheaper side of fair value and is not a bad level for our exports either. Encouragingly, the weakness has not been particularly inflationary given that the oil price has fallen off aggressively and the rand oil price remains unchanged on the month. The Rand is likely to remain between R8.50 and R7.50 against the US Dollar for the remainder of the year.

Against the backdrop of global uncertainty, where growth is going to remain under pressure, we believe the SARB will continue to be very concerned about the risk of a protracted period of sluggish growth. We expect GDP to come out at a disappointing 2.7% for 2012, but at least CPI should be back inside the SARB’s target band by third quarter of this year. We therefore don’t expect any upward move in interest rates for the rest of the year, and possibly for the next 12 months.

The SA bond market

South African bonds have been relatively well behaved over this period. Despite the fact that they have had a negative month, the sell-off has been more muted than the currency movement would have suggested. Bond yields are again starting to reach attractive levels of around 9% (30-year bond), considering cash remains anchored at 5.5%.

Our funds

We were conservatively positioned going into this move, as most of our bond exposure has been in high-yielding corporates and short-dated government bonds. We have started to slowly add longer-dated bonds to our portfolios into the sell-off and will continue to do so if yields continue to rise.

In terms of the Investec Diversified Income Fund, which is mandated to have up to 25% international exposure, we have just over 11% of the portfolio in offshore assets, which has buffered the portfolio well. We will look to reduce this at these weaker currency levels.

Being right about muddle-through hasn’t made investing any easier

Most predicted that politically and often economically the year 2012 would be a muddle-through year – particularly for those heavily indebted western nations. So far this has been right. However it hasn’t made investing any easier, with many investors finding this muddle-through approach even more confusing, indecisive and uninspiring. It doesn’t create confidence.

Confidence is a crucial investor characteristic and skill. You have to believe in your own ability to save, and in the expert’s ability to whom you have entrusted your hard earned rands. You want these rands to grow so you can achieve and/or maintain financial independence. You don’t want these rands to disappear. A few knocks we can all take – too many of too large a magnitude and confidence disappears very quickly. The dream of financial independence gets replaced with a preservation only mindset.

A confident investor is a consistent investor and a responsible investor who develops a plan, sticks to it, adapts it where necessary as their situation changes. A confident investor allows for overall long term growth in their portfolio. An investor who is not confident is jittery, reacts to short term moves and can destroy wealth and opportunity through growth with their ever present nervousness. Our current economic and political climate tends towards the unconfident investor. This needs to change. A climate is a climate that an individual has an ability to master and overcome. It requires focusing on the basics and shutting out the noise – however distracting it is.

Three confident investor essentials:

1. Your needs matter most

These are your unique needs. They don’t usually hinge on what the premier of a country is doing or not. You need to provide and protect – for yourself, for your family, your assets. A neither here nor there and all over the place economy and political situation does not change this (apart from perhaps increasing the need to provide and protect).

“The only reason to make any investment at any point in time is because it offers value.” This is from Piet Viljoen of RE CM who was part of a panel discussion at the Glacier by Sanlam International Roadshow last week.

2. Your relationship with an adviser and investment/wealth manager matter

This is also something that needs to take place and is not dependent on politics or economics.

Who is managing your money and assisting you with your plan, do you all understand each other’s needs and processes and how you will all work together to achieve the needs you have identified. Your wealth manager is there to help you achieve your goals – you need to understand each other – and then allow all involved to do their jobs and provide regular updates as agreed.

3. Identify what change matters

All change matters in some way – but we cannot focus on everything as there is just too much happening. And political and economic regimes come and go. Sometimes not so pleasantly. But is this the change that matters most to your financial goals or is it the changes in your life that will impact how you save, invest and protect?

Politics and economics do matter and they do affect our lives – but the centre of the financial plan must be the investor and their needs.

We live in a wonderfully well connected world – it’s interesting and vibrant, dynamic and stressful. Being successful requires focusing on what really matters, what we can control and how we can achieve. It involves knowledge and selective application of that knowledge.

“To succeed in life, you need two things: ignorance and confidence.”

Mark Twain

What is best for investing– lump sums or regular contributions?

Investors are often confronted with the conundrum of whether to invest a single lump sum at a specific point in time, or whether to contribute a regular amount to an investment. Should you invest R12 000 now or rather invest R1 000 per month for the next 12 months?

“The best way to answer this question is to compare the rates of return earned when investing lump sums or equivalent regular contributions in the South African equity market,” says Mario Schoeman of Foord Asset Management.

Lump sum investing – success is dependent on your investment horizon

“When you examine monthly total return data for the JSE (going back to January 1960, a period of over 50 years), it becomes clear that the longer your investment horizon, the more indifferent you are to timing the market (or waiting for the perfect moment to invest a lump sum). Over all 1-year investment periods, the highest return earned is 123%, and the lowest return is -47% with an average of 21%.”

“While the average looks appealing, the downside risk does not,” says Schoeman. “Stretching the investment horizon to five years, the maximum and minimum annual returns contract to 46% and 1% respectively, while the average remains relatively constant at 18%.

The impact of a long term investment horizon is profound: over all 20-year investment horizons, the maximum annual return is 26% per annum, the minimum is 15% per annum and the average is 19% per annum. The message is clear: the longer your investment horizon, the less you need to concern yourself with market timing. Hence, lump sum investing is fraught with fewer dangers the longer you intend to invest.

Monthly contributions to an investment – average returns higher than lump sum investments

So what of the benefits of regular investing? “Often the sentiment exists that ‘if I don’t have a large lump sum to invest I cannot get started’, says Schoeman. “This is incorrect – making monthly contributions to an investment has been proved to offer higher average returns in many instances.”

According to Schoeman, the term “rand cost averaging” is often used to refer to the advantage of regular investing, specifically the notion of buying when the market is up or down and so converging to a better average price.

“The results of an analysis of actual equivalent returns on capital are even more profound. Over investment horizons shorter than five years, the average return earned by a regular investor is statistically significantly higher than that earned by a lump sum investor.”

However, the additional benefit of investing regularly declines from almost 6% pa over one year investment horizons to just over 1% pa over four year investment horizons. Beyond that, the improvement in average returns amounts to just 0.5% pa (although this increment compounded over 20 years, results in a 10% increase in wealth at the end of the investment horizon!). “This is consistent with the earlier observation that investors are relatively indifferent to market timing the longer their investment horizons. It is also consistent with the notion that volatility should have little bearing on the perspective of a long term investor,” says Schoeman.

“What is clear is that regular contributions to an investment offer an investor the prospect of somewhat higher average returns over the shorter term as advantage is taken of the market’s vagaries and the associated timing benefits. However, the analysis set out is based on consistent investor behaviour. Undoubtedly, such consistency is at the very root of investment success.”

The opinion and comment in this newsletter is opinion and comment only and does not in any way constitute financial advice. Please seek professional advice from a registered financial adviser for all investment and financial decisions.

Competitiveness in uncertain times – Four trends to watch

By IMD Professor Stéphane Garelli

IMD’s World Competitiveness Center is preparing its 2012 country rankings amid unprecedented levels of global economic uncertainty. Interpreting the constant flurry of news – some of it bright, some of it gloomy – is not an easy task.

All will be revealed when the rankings are released in late May. In the meantime, here are four of the trends that will influence this year’s competitiveness scores:

1. The global economy is fragmenting

It is very difficult to talk about a ‘global economy’ because every kind of economic model is out there. Some countries are overheating, like China and maybe Turkey. Some countries are in recession – obviously Greece, perhaps Spain too this year. Some are risking inflation, like Russia and India, while some are risking deflation, like Japan and maybe Switzerland.

Perhaps one of the biggest impacts of the recession was to fragment the global economy, rather like a diffraction of the light. The global economy was a white light, but now there are all kinds of shades, and companies will find it very hard to react to that.

Companies will have to adopt several parallel business models. Some of these will be adapted to countries with high inflation, others to markets with a very strong middle class. In emerging economies, for example, there is a fast-growing ‘less poor’ class, and firms will need a business model for that too.

So companies need to be flexible, nimble and tuned in to local or regional markets. The difficulty is to manage this diversity of business models in a highly efficient way.

2. Businesses will use their cash

Much of the current gloom is coming from financial institutions and governments, and the market is extremely sensitive to this bad news. But quite a lot of businesses, including those that come to IMD, are doing better than many people would expect.

Just one example: towards the end of last year American companies had USD2,150 billion in cash on their balance sheet, with Apple alone having something like USD98 billion (a few billion more than the US Treasury). There has never been so much cash on corporate balance sheets.

What do companies do with all this cash? The first thing is to buy back their shares and push the price up a bit, because they feel that their stock is undervalued and want to protect themselves from a possible takeover bid. The second is to acquire other companies, so expect to see a lot of mergers and acquisitions in 2012.

From an investor’s perspective, a good buy for 2012 will be blue-chip international companies that have diversification of risk and a good amount of cash. They still have a market, people are still buying – and most probably they will do whatever they can to maintain their share price.

3. Mature economies need to reindustrialize

The ‘Made in’ model is going to be a critical aspect of 2012 for a very simple reason: the unemployment numbers are terrible. The jobless rate is 10.4% in Europe and 8.6% in the US. For youth unemployment, double the numbers: 18.5% in the US, 21.3% in Europe and as high as 48.7% in Spain. This is a social time bomb and is unacceptable – especially with elections coming up in France, the US and elsewhere.

How do countries create jobs? They have to manufacture and they have to export. So they are going to rediscover industrialization. In the last 20 years, the US, Europe and Japan have lost about 20% of their industry in terms of its share of GDP, and this is not acceptable.

Mature economies will have to go back to ‘re-shoring’ and have more domestic manufacturing. This is a big issue in the US. Jeff Immelt, the CEO of General Electric, is very much pushing this agenda. So is Mr Sarkozy in France. They are right to do so. The ‘Made in’ is important, because a country is ultimately defined by what it makes.

Alongside this, expect to see much more flexible labor forces across the world. Rather than firing people, many companies will try to reduce working hours and lower wage rates a bit. Both employers and labor unions have a huge role to play here.

4. The euro will survive

The euro will not disappear. Why? Because it would be such a shock for everybody, because so much has been invested in the euro politically, and because exiting the euro probably isn’t in the interests of the peripheral economies in the euro zone.

If Greece went back to the drachma, it would still have to pay for its imports in euros or dollars. This will bring inflation up, possibly to Zimbabwe-type levels, thousands of percent. And that would be terrible.

So this problem of the euro has to be solved, and the single currency has to be made to work. The critical aspect is that at the end of the day, the markets have to see the ‘lender of last resort’ in Europe. And it has to be the European Central Bank – or an institution that says, “Here – whatever the debts are, we are going to pay them.” The price of doing this will be high, but the price of letting the euro go will be even higher.

Final thoughts

The dream of globalization – a unified world economy, global business model and convergence everywhere – is clearly not going to be realized in 2012. The biggest challenge for senior executives this year will be to manage diverse business models simultaneously.

The main worry is that companies have heard so much bad news from banks and governments recently that many of them have made a plan B just in case. The problem is that when everybody makes a Plan B, the Plan B scenario might actually happen.

Professor Stéphane Garelli is the director of IMDs World Competitiveness Center and teaches on IMD’s Orchestrating Winning Performance program.

The opinion and comment in this newsletter is opinion and comment only and does not in any way constitute financial advice. Please consult a professional financial planner for all investment and financial decisions.

In the midst of a sluggish global and local economy, faced with escalating fuel costs, soaring electricity prices, and a report last month announcing that 440 000 companies closed their doors over the past five years, it is little wonder that many business owners are left with a feeling of uncertainty and cutting costs wherever possible.

For a company to remain sustainable throughout the economic slowdown, it is imperative that business owners take steps to control expenses. However, it is crucial to plan ahead and consider that in cutting certain expenditures, they could be exposed to even higher costs, and should identify ways of mitigating these potential added risks.

“2012 is shaping up to be a tougher year on industry. As the increase in fuel prices drive up other costs, many companies are forced to cut expenses. However, eliminating some costs may result in a substantial loss down the road,” says Lourens Joubert, head of commercial underwriting at Santam, SA’s largest short-term insurer.

A volatile rand can affect the value of imported equipment and parts so manufacturers must keep track of the fluctuating value of their machinery and equipment. Joubert suggests business owners revise their insurance policies and conduct a needs analysis twice a year with a broker to address changes and to ensure they are neither over nor underinsured.

With so many businesses shutting down in the last few years, a real threat to many companies that rely on the use of a preferred contractor is the fear that their sole service provider will shut their doors with little or no warning. Continuously seeking for alternative suppliers can lessen the risk of being potentially stranded if one supplier closes down.

“Business owners can also protect themselves by diversifying their supply chain and using a number of different contractors. Plan ahead and don’t rely on only one supply chain to meet your needs,” continues Joubert.

The face of the supply chain has also changed with the introduction of the Consumer Protection Act (CPA). Defective products have historically only been the responsibility of the manufacturer. However, since the CPA came into effect on 01 April 2011, the retailer and everyone else in the supply chain can be held liable for failed goods.

“We have yet to see the full impact of this act and as a result many business owners have remained very relaxed on the issue,” cautions Joubert. “However, businesses need to make provisions for returned stock and the increased liabilities which will ultimately lower profits.”

In the past, businesses not directly involved in manufacturing have only required general liability insurance but now anyone in the value chain such as retailers are now also be held liable for faulty goods and there can be grim financial repercussions for those not adequately covered by products liability insurance.

Keeping fewer critical replacement parts in stock for manufacturing equipment may reduce a capital outlay for manufacturers who are hoping to keep costs low. However, in the long run this practice may have a negative impact on the running of the business and production may cease if a critical component breaks unexpectedly and an alternate is not available for delivery immediately.

“Recognising the inevitability of certain events, imagining a number of ‘what if’ scenarios, preparing for them in advance, and incorporating them into the business continuity plan or disaster recovery plan is a necessity for all businesses of all sizes,” says Joubert.

Key management should be responsible for identifying weaknesses and ways of mitigating these risks within the company. Best practices should be adopted and documented and included in the corporate strategy. “Those who do not have a contingency plan in place will be ill-prepared to deal with a crisis. For example, flooding is becoming an increased threat that can compromise supply routes if a bridge or road gets washed away and produce cannot be delivered to customers. By recognising the potential impact on business alternatives can be identified ahead of time, and the risk mitigated.”

“Businesses that want to succeed over the next several years must develop cost-effective risk mitigation plans that assess all potential risk,” concludes Joubert.