Picture: THINKSTOCK
Picture: THINKSTOCK

WITH the outlook for SA’s economy becoming bleaker and insolvencies on the rise, experts are warning that businesses need to pay closer attention to their financial health to avoid getting into bigger trouble.

Earlier this month the World Bank noted that the South African economy was "flirting with stagnation, if not recession". The international lender projected growth of 0.8% for this year, in line with the International Monetary Fund’s (IMF’s) forecast of 0.7%.

But next year’s growth estimate of 1.1% was considerably lower than the IMF’s expectation of 1.8%.

According to trade credit insurance provider Euler Hermes, insolvencies will increase this year due to the instability in emerging markets. The group’s economic outlook 2015-16 report states that insolvencies in SA will increase roughly 10% due to a slowdown in economic growth.

Smaller businesses are expected to come under severe pressure as the economy continues to flounder, and experts say it is crucial for managers at all levels of such businesses to have an understanding of financial statements and do some simple financial analysis.

"Being financially literate will assist managers in this regard, as they will give an indication of which assets can help their business, and which will not. Unless you can read the language of finance, you might find yourself making the wrong choices," Mark Graham, from the University of Cape Town college of accounting, said on Tuesday.

He said that there is no doubt that financial skills become crucially important during economic downturns and when companies are not doing well.

Prof Graham said that while debt was critical for leverage and an important tool to help a company grow, excessive debt could prevent it from being agile, because lenders often placed restrictions on loans locking companies into a strategic path.

"And of course if interest and principal payments are not made as per the contract, a company can lose assets or even face bankruptcy. Monitoring balance sheet ratios effectively at such times is critical. Furthermore, working capital and margins need to be carefully monitored and costs kept under control," he said.

Prof Graham said it should not just be the job of the chief financial officer to keep an eye on the numbers.

"It is during times of economic stress that the ability to read financial statements and do some simple financial analysis becomes paramount at all levels of an organisation," he said.

Smaller businesses will be under more pressure as they often have less access to extra credit or financial support. For them, having a thorough understanding of their finances will be crucial to ensuring that they do not flounder when the economy hits rough waters, said business adviser Brad Farris.