It is easy to start a business with or without some capital. However, to run and grow it is an altogether different matter. The reason most businesses fail is due to obstructions in business finance flow. New entrepreneurs are at high risk during the first few years. If you are thinking of starting a business then it helps to know more about how to manage business finance and use it as a tool to manage and grow.
Engage a financial expert
As an entrepreneur you may be skilled in technology or marketing and, for you, business finance management may be a different ball game. Until you learn the ropes, and even after that, you will find it extremely useful to engage the services of a tax consultant, a financial consultant or a chartered accountant to help you with proper financial and legal guidance. Your chartered accountant will help to define budgets, point out issues in cash flow, cash management and expenses, each or all of which influence your business. Even then, it helps to know more about financial management.
Analytics
Entrepreneurs are likely to be extremely busy with their routine activities and are likely to pay less attention to the financial side and to analytics. If you wish to keep your finances in the black then it helps to engage in analytics every week or every month. You will find it helpful to keep financial records up to date and analyze all aspects such as spending, routine expenses, travel, promotions, salaries, sales, debts and outstanding. Prepare a profit and loss account for each month. Analytics will help you to know your status as regards income, expenditure, profits and other aspects. It will give you insights as to where you are spending more and about unnecessary expenses and you can redefine your financial strategies, such as, for example, being more diligent about collecting outstanding dues or finding vendors who offer a better price for inputs and raw materials. Opt for IT infrastructure right from the start—it is worth the investment. While an IT infrastructure is good enough to automate bookkeeping and help you with analytics, it also means that you must devote some time each day to get an overview of your business finances and state of health.
Tax planning
A business is subject to taxes. You will have to collect and deposit GST in time to avoid penalties and keep your books in order. At the same time businessmen are also liable to file income tax returns and pay advance tax. Plan cash flow to take care of advance taxes, properly computing the taxable income. This is where a chartered accountant can help you to claim legitimate deductions and reduce tax impact.
Corporate Finance
Corporate finance is a branch of finance that is important in all businesses. It defines how businesses cope with financing sources, capital structure, accounting, and investment choices.
Controlling finances
It is easy to hire people and pay salaries. It is easy to plan a marketing campaign. It is easy to hire taxis and one must travel to get business. However, common to all these is the expense factor. Every little thing adds up and, in the end, if all these expenses outweigh the income then you are running into losses. Consider:
- Can you make do with less people hired on salary basis and thus reduce the incidence of salary expenses?
- Can you find out alternate, low cost methods of digital marketing?
- Can you reduce travel and switch to online meetings and conferences?
There is a point up to which expenses can be reduced without affecting your business flow and growth. Aim to keep expenses low.
While on the topic, it is commonly observed that entrepreneurs club their personal expenses into the company account. Do not do this. Keep your personal accounts separate.
Inventory control is a vital tool to be used judiciously to ensure your business finance is not locked in stock.
Buffer & reserve
Entrepreneurs are likely to be buoyed up with initial success and will not think of maintaining a buffer or reserve for times when cash flow reduces. Not having reserves can strain your finances, and, worse, it can even bring business operations to a slowdown or halt. Keep some money in reserve and think of the flywheel principle. The reserve will act as your flywheel, helping you maintain business when sales are low.
Lines of credit
One of the principles of business is “other people’s money” by which we do not mean that you should borrow from people. In the business context it means keeping open lines of credit. One must, of course, have some sort of cash credit facility with a bank. At the same time, also keep open options you can exercise to get your hands on cash immediately to meet short-term needs such as when you have a big order and must pay suppliers immediately.
Payments
Smart and shrewd businessmen will work on two things: One is to get extended credit on purchases and the other is to get cash payment for their sales or to collect payments fast. Work on these two aspects, particularly collection of bills from buyers.
Markets
Your business is running well but will it continue to do so? Your business finance health depends on a steady growth but if competitors are coming up with similar or better products or if the demand is in decline you must know so as to be able to take action well in time.
There is plenty more to do but taking care of these basics will give you a clear picture of your financial health so that you can take corrective action on an ongoing basis.
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