Those who follow structured practices consistently outperform other businesses. SMEs/ Small businesses owners MUST keep this in mind as in the early stage of business adopting right management practices not only helps business grow but also mature. In the growth phase with limited resources the owners might not pay required attention to financial management which could result in subsequent cash crunch, margin & cost pressures and result into poor profitability.
The following five financial habits will equip SME owners with a new perspective to better manage the current business and prepare for the future,
1) Right Financial Structure
It begins with creating a right chart of accounts at the beginning of the financial year. These are the income and expenditure heads against which all the financial transactions should be segregated. This is first important step in financial management as it allows the business owner to later track & monitor individual business expenses and revenue across different products and services. In majority of the businesses the margin and cost analysis becomes difficult due to absence of clearly defined chart of accounts. This impacts the ability of the business to be competitive and also gain higher profits.
2) Forecast & Budget
Next in line is the annual planning process. Every year the owner and key members must create sales forecast and expenditure budget. Both of these provide guidance & targets for managing the finances well. Sales forecast and Budget should be detailed on two aspects A) Category wise across Income and expenditure and B) Month on month basis. The sales forecast should include addition of any new product/ services as well as new customer segment with higher margins if any and the budget should cover additional investments or expenditure for higher capabilities.
3) Regular review
Most of the business owners fail in conducting an ongoing review of the business. Once the forecast and budgets are defined those need to be tracked against defined chart of accounts to see the variances if any. Monthly review will help track whether or not right efforts and actions are happening on sales & marketing front and review of budgets will ensure costs are in control. Month on month review ensures actions are translating into results while quarterly and half yearly review can provide inputs to course correction and refinement. Reducing costs and maximizing margins should always be the focus of any business.
4) Attention to Taxes & Debt
Whenever there are challenges with the cash flow a business owner defers tax payments followed by delays in loan and interest repayment. Defaulting on any of these is surely not a sign of a healthy business. Paying taxes on time not only ensures that business doesn’t have to pay interest and penalties but creates a good compliance track record. This helps in dealing with large corporate who are particular about compliances and also help at the time of raising finances from bank.
5) Strengthen the balance sheet
One of the crucial aspects of business growth is its ability to raise money to tap right opportunities at right time. Banks finance against a strong balance sheet reflecting assets, collateral, stocks and order book. Showing less revenues or profits to avoid taxes might feel like a smart move but it certainly proves problematic in the longer run. Absence of higher incremental revenues and profits limits company’s ability to raise finances.
Asset heavy and light on liabilities is sign of a healthy business. However it’s okay to have higher liabilities as long as it is funding business expansion.
A successful and smart business owner takes keen interest in understanding and managing finance regularly and doesn’t leave everything to the CA or the accounts person to manage. So get in control of your finances, today!