Finance for Small Businesses
Chetan, a Chartered Accountant with over 25 years of extensive experience in finance, is now engaged in spearheading the finance function of the firm as its CFO.
Entrepreneurial ventures are blossoming and growing at a much faster pace in the recent past. The startup space has seen many new ventures being set up by bright young minds (BYM’s). They all possess the required skill and knowledge to run their business however what’s regularly ignored or rather taken for granted are the aspects related to the finance function which require indepth knowledge as well as acumen. This article attempts to highlight the aspects related to the finance function that all entrepreneurs should most definitely consider putting in place to ensure smooth functioning of their entrepreneurial venture.
The Eight must Do’s by Small Businesses for the Smooth Operation of the Finance Function Budgets & Monitoring
The most important aspect is to have a goal which is achievable and also continuous monitoring of actuals with budgets as the year progresses.
1.Revenue Forecasting: It’s important for the business to forecast its probable revenue scenario. This will form the basis for structuring the other aspect of the business. How much cost can we take on? In case of manufacturing companies we need information on sales and gross margin.
a.Opex - Operating expenses (OPEX) has two main components
1. People – Salaries and wages of human capital required achieving the revenue targets and to run the business efficiently forms the first expense which one will need to work out.
2.Other expenses/Overheads - Other expenses for running the operations would include rent, utilities, taxes, travel costs and more which will be the overheads needed to run the operations.
b.Capex – Monies which are need for the capital equipment’s/assets of the business like computers, plant and machinery are classified as capex and it’s important to budget for these correctly as these will involve a huge upfront cost commitment which may involve an upfront cash payout or may entail a leasing arrangement.
c.Regular Review against Budget – Just setting an annual budget isn’t enough it’s important to at least have a quarterly review to understand the actual performance against budgets which can also help make course corrections as may be required to the cost structures.
2. Recruiting the Perfect Team: The finance team on the business needs to be as perfect as the football team on the pitch to achieve the goal. Hence it’s important we recruit the team with the perfect skill and acumen to play the desired roles.
3.Designing Policies/Process notes around Sound Accounting & MIS system:
Organisations policies play an important role in setting the rules for operations within the company to guide employees on the roles and responsibilities of each employees and the management should lay huge emphasis on compliance with policies/ processes. The MIS system should also be robust to capture operational performance on the operating matrices.
4.RFT: RFT or Right First Time is the philosophy of completing each task right the first time it’s done so as to ensure that there is no additional effort in duplication of the same task arising out of a mistake as also ensuring right accounting.
5.WC Management: Billing on time and collecting dues on time is all it takes to ensure working capital is managed efficiently and surplus or deficit is invested or funded as the case may be. It also allows the business to manage timely payout towards third party business partners as well as employee salaries and overheads.
6.Credit Appraisal & Credit Control: This aspect of the business is important as it lays emphasis on the credit that can be extended to customers based on their financial standing or their credit history. There is also a strong need to check promoter’s background as well to ensure that the client is a honest company which will meet its obligations as committed.
7. Tax & Regulatory Compliance: Compliance with regulations related to tax and other regulatory aspects is important to ensure the organisation is on the right side of the law and can conduct its business peacefully in future.
8.Outsource Non-critical Processes: The organisation should lay emphasis on managing the processes which are business critical and outsource non-critical processes. The customer acquisition process for example should be inhouse whereas payroll processing can be outsourced.
Three Key Metrics to Track
Ratio analysis gives a clear picture on the financial position of the business and is used to track the same.
• Profitability – Net Profit Ratio -This is the ratio which is the ratio indicating the net profit on revenue/sales and allows us to compare the profitability of the business against its peer group as well as against past periods.
• Operational efficiency – ROI – This ratio allows us to measure the return that the organisation has made on the investment in the business.
• Liquidity- Current Ratio – This is the ratio which indicates the comparison of short term receivables against short term payables.
•In conclusion I must emphasise that the brain behind the business needs a brain to run the finance operations as efficiently as the business for both to ensure long term success.
Entrepreneurial ventures are blossoming and growing at a much faster pace in the recent past. The startup space has seen many new ventures being set up by bright young minds (BYM’s). They all possess the required skill and knowledge to run their business however what’s regularly ignored or rather taken for granted are the aspects related to the finance function which require indepth knowledge as well as acumen. This article attempts to highlight the aspects related to the finance function that all entrepreneurs should most definitely consider putting in place to ensure smooth functioning of their entrepreneurial venture.
Just setting an annual budget isn’t enough it’s important to at least have a quarterly review to understand the actual performance against budgets
The Eight must Do’s by Small Businesses for the Smooth Operation of the Finance Function Budgets & Monitoring
The most important aspect is to have a goal which is achievable and also continuous monitoring of actuals with budgets as the year progresses.
1.Revenue Forecasting: It’s important for the business to forecast its probable revenue scenario. This will form the basis for structuring the other aspect of the business. How much cost can we take on? In case of manufacturing companies we need information on sales and gross margin.
a.Opex - Operating expenses (OPEX) has two main components
1. People – Salaries and wages of human capital required achieving the revenue targets and to run the business efficiently forms the first expense which one will need to work out.
2.Other expenses/Overheads - Other expenses for running the operations would include rent, utilities, taxes, travel costs and more which will be the overheads needed to run the operations.
b.Capex – Monies which are need for the capital equipment’s/assets of the business like computers, plant and machinery are classified as capex and it’s important to budget for these correctly as these will involve a huge upfront cost commitment which may involve an upfront cash payout or may entail a leasing arrangement.
c.Regular Review against Budget – Just setting an annual budget isn’t enough it’s important to at least have a quarterly review to understand the actual performance against budgets which can also help make course corrections as may be required to the cost structures.
2. Recruiting the Perfect Team: The finance team on the business needs to be as perfect as the football team on the pitch to achieve the goal. Hence it’s important we recruit the team with the perfect skill and acumen to play the desired roles.
3.Designing Policies/Process notes around Sound Accounting & MIS system:
Organisations policies play an important role in setting the rules for operations within the company to guide employees on the roles and responsibilities of each employees and the management should lay huge emphasis on compliance with policies/ processes. The MIS system should also be robust to capture operational performance on the operating matrices.
4.RFT: RFT or Right First Time is the philosophy of completing each task right the first time it’s done so as to ensure that there is no additional effort in duplication of the same task arising out of a mistake as also ensuring right accounting.
5.WC Management: Billing on time and collecting dues on time is all it takes to ensure working capital is managed efficiently and surplus or deficit is invested or funded as the case may be. It also allows the business to manage timely payout towards third party business partners as well as employee salaries and overheads.
6.Credit Appraisal & Credit Control: This aspect of the business is important as it lays emphasis on the credit that can be extended to customers based on their financial standing or their credit history. There is also a strong need to check promoter’s background as well to ensure that the client is a honest company which will meet its obligations as committed.
7. Tax & Regulatory Compliance: Compliance with regulations related to tax and other regulatory aspects is important to ensure the organisation is on the right side of the law and can conduct its business peacefully in future.
8.Outsource Non-critical Processes: The organisation should lay emphasis on managing the processes which are business critical and outsource non-critical processes. The customer acquisition process for example should be inhouse whereas payroll processing can be outsourced.
Three Key Metrics to Track
Ratio analysis gives a clear picture on the financial position of the business and is used to track the same.
• Profitability – Net Profit Ratio -This is the ratio which is the ratio indicating the net profit on revenue/sales and allows us to compare the profitability of the business against its peer group as well as against past periods.
• Operational efficiency – ROI – This ratio allows us to measure the return that the organisation has made on the investment in the business.
• Liquidity- Current Ratio – This is the ratio which indicates the comparison of short term receivables against short term payables.
•In conclusion I must emphasise that the brain behind the business needs a brain to run the finance operations as efficiently as the business for both to ensure long term success.
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