BEE Partner, South Africa Economy Watch

Targets

The targets are discussed before indicator terminology in this element because they are necessary for understanding some of the indicator terminology. Enterprise development and socio-economic development use the same methodology for calculating the target. The calculation is not clearly articulated in the Codes and is a technical calculation.

The target for enterprise development is given as NPAT, which refers to net profit after tax. The target is 2% of net profit after tax. This is not difficult to calculate. The problem with this target is that net profit after tax is an easily manipulated figure. As an anti-circumvention section, the Codes provide that where a business has an NPAT that is either a loss or less than a quarter of the industry standard, then a turnover- based target will be used.

As mentioned, the intention is not clear, but my interpretation is as follows. Although not specified, the Codes are attempting to create a tiered approach.

• The target is 2% of annual average NPAT.

• Where average annual NPAT is not a profit then the target becomes 2% of the entity’s average NPAT for the preceding five years.
• Where this amount does not reflect a profit then the target becomes turnover based as per a formula provided below.
• Regardless of the above, where net profit margin or average net profit margin is less than a quarter of the industry norm, then NPAT may no longer be used and the target becomes turnover based.

Practically no guidance is provided on how to obtain the figure representing the industry norm. I suspect that in the QSE environment, perhaps with the exception of heavily regulated industries and franchises, this may be unobtainable, particularly where the industry is dominated by private companies who have no obligation to disclose their results publicly.

The calculation of the NPAT target is self-explanatory. It is 2% of the business’s net profit after tax.

The calculation of the turnover-based target is slightly more complicated. The formula provided is given as:

Target = 2% x indicative profit margin x turnover

The indicative profit margin is NPAT divided by turnover. The NPAT must be taken from the last year where the entity’s profit margin was greater than a quarter of the industry average. Although not stated, it appears as though the turnover for calculating the indicative profit margin refers to the turnover from the same period when the NPAT is taken.

The difficulty with this target is that genuine loss-making companies are going to have to dig further into their losses to contribute to the enterprise development of other businesses. Perhaps a more appropriate target would have been a percentage of prior year taxable income.

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