10 GOLDEN RULES FOR FINANCIALLY SOUND BUSINESS
- Develop a budget
Budgeting is key to a business’s financial success. A realistic and detailed budget with a proper breakdown of revenue and expenses per month / quarter is one of the key tools which will help you navigate your business in the right direction. A solid budget identifies currently available funds, estimates expenses and helps in anticipating revenues. This will also help you compare your actual performance, identify variances and take corrective measures before it is too late. Without a budget you are just shooting in the dark!!!!
- Have proper accounting records
If you do not have proper accounting records, you do not have a clear picture about the financial performance of your business and the business decisions you take will be flawed – as simple as that. Maintaining proper accounting records also will enable you to convince a lender or investor faster to put money into your business. Finally it helps you comply with the applicable laws and avoid the time consuming and costly penalties.
- Pay on time
This is what I call a Karma related point – you don’t pay your vendors or your employees on time – your customers will not pay you on time. I think that is just the way the universe works!!! Making timely payments to employees improves employee morale and increases worker productivity. At the same time it reduces employee turnover. Making payment to vendors on time builds up a better relationship with the vendors and increases suppliers’ confidence in you as a business partner.
- Avoid borrowing too much
Debt at the right proportion might be good for your business. However as with the wise old saying even nectar is bad when consumed too much, you need to know when to stop borrowing. Else you, as an entrepreneur, will be working just for the bank, to pay interest to them. Apart from the huge strain of paying interest, there is the risk of providing personal guarantees /collaterals to the bank for business debts. Avoid, and I repeat, avoid taking short term debts for long term requirements.
- Closely watch your cash flow
The biggest circus you are doing as a business owner is managing your cash in vs. your cash out. Although profitability is important, if you do not manage your cash well, you may experience what in business terms is called cash flow death. You have probably heard the statistic that more than 60% of businesses which were profitable closed down due to cash flow issues. Preparing cash flow forecasts and analysing it on a monthly basis will help you stay on top of this. Did you know Nike (having high profits) was on the verge of shutdown in 1970s due to poor cash flow management? Cash Flows are Reality. Remember, Cash is King.
- Obey the rules (statutory compliance)
Ignorance of rules is not an excuse. If you drive a car, can you give the excuse that you weren’t aware of traffic rules? The same can also be said for operating a business under various legal forms. Each legal form of doing business has its own specific compliances to be made, also depending on the industry in which you operate. It is extremely important to take professional help where needed to stay compliant. Penalties and punishments for various offenses could be extremely time consuming and costly to fix, if at all it can be fixed.
- Ensure adequate working capital
Working capital is the fund utilized for day to day business activities. It represents the efficiency of businesses operations and its stability in the short term. If you do not have enough working capital to meet your short term liabilities, even the existence of your business will be in question. Working capital is the liquid assets available minus immediate liabilities. Also remember, never use your working capital fund for long term purpose like purchasing fixed assets etc.
- Only withdraw from profits and not based on cash flow
Let’s get that clear – Profit and cash flow are both important elements of a healthy, growing business, but they are not the same. It is possible for you to have a good cash flow while running a loss and vice versa. Cash seen in your business could be advance given by customers, payments delayed to suppliers, credit given by suppliers etc. Please ensure that you are withdrawing money only if it a share of profit.
- Do not divert funds
Diverting funds from your business will kill the business in 99% of the cases. Many promoters who diverted funds which was raised for working capital needs, has been caught in the cycle of not being able to finance their day-to-day operations. Also, this reflects poorly on the business when an investor/lender does a due diligence to understand risk elements of your business. Your current investor/lender could lose trust in you and your business and further funds may be refused for your business.
- Train your team also on fundamental finance concepts
Employees who have basic knowledge of finance and accounting will be more efficient at managing day-to-day operations and in making right decisions for the business. Also this will help them in their interaction with finance department and to understand how their actions would influence the numbers. Training on financial fundamentals and concepts for employees in marketing, materials, human resource, and other non-financial domains will help in working together to attain common business objectives.