One has to be very careful with financial management during challenging times like this. Corona and lockdown have taught both commoners and entrepreneurs some valuable lessons. In the latest edition of Channeliam.com’s Discover and Recover, Vivek Krishna Govind, Senior Partner at Varma and Varma Chartered Accountants, talks about points to remember while controlling expenses.
The 5 areas which enterprises including MSMEs should focus on:
1) Cash flow and working capital management
2) Control over cost and expenditure
3) Fund diversion
4) Budgeting system
5) Proper financial reporting, internal controls and MIS
Cash flow and working capital management
The profit growth doesn’t translate into more money. Profit can never be spent. Only cash can be spent. So, cash is the king. Good cash management means finding out the best sources for cash. To do that, one needs to focus on the cash to cash conversion cycle. Only then, they can find out where the money is blocked and try to recover it. Focus on Inventory Management, Payable Extension, Negotiation & Re-Negotiation and Receivables. Entrepreneurs should also try to find working capital in other mediums.
Control over cost and expenditure
Cost reduction is an important task during these times. These days have taught us that we can save money up to a great extent. Focus on cost-effective working models. It is proven that life and profession can be steered forward without big expenses. Try to convert fixed costs to variable costs through leasing model and rental model. Undertake activities like salary reduction only after proper consultation. Revenue sharing models can also be tried.
Cash rolling is a common task in almost all enterprises. But one should remember that this is not an apt time for that. Employ long-term and short-term loans for specified purposes. Do not divert working capital or divert housing loans into the business. Use loans for permitted purposes. Never divert money since it may lead to a financial crisis.
During a crisis like this, it is difficult to think or focus on budgeting. The best model that can be adopted now is a zero-based budgeting system, which means starting afresh. Forget the past years and start from scratch. Every aspect of the business needs to be re-arranged. Usually, the next year’s budget is calculated by adding 10-15% to the previous year. All line items, income and cost should be freshly calculated. Look at ways to increase revenue.
Proper Financial Reporting
It is time for a better financial structure. This period can be used to learn and apply internal controls and audit mechanisms. An entrepreneur should know the basics of accounting like general ledger, trial balance, balance sheet, profit and loss. There are online courses which can help with this.
Having the best Management Information System (MIS) is a must. MIS varies with business. Make sure that you have the best internal control system. Ensure that the business runs smoothly even in your absence.
While there are other key areas to be addressed, these are the most important ones, says Vivek. This is the time for having effective communication. Communicate with Customers, Vendors and Bankers. Assure them that they can overcome the current crisis. Work for Collective Improvement and realistically accept the surroundings. The time for the competition is over and try to work with the face of humanity.