Managing finance is one of the crucial factors for survival in business. A strong financial structure is required to stay credible and be profitable. Scarcity of funds or mismanagement of finance remains one of the major contributors to business failure and can have your dream come to an end. Here are 6 tips to help you manage your company’s finances.
“Revenue is vanity, profit is sanity” – Neeraj Shah
Here are few steps that will help you manage your finances better;
Keep a check on the cash flow:
Cash is like oxygen for your business. First of all, it is very important for an entrepreneur to be vigilant and keep strict checks in place on your cash flow. How much is coming in, going out and for what purpose has to be tracked. Therefore, This is one of the basic steps to be followed at the initial stages.
The business can have accounting software and accountants in place in order to keep track of the finances. Many accounting packages have automated reminders for invoices that are due from customers. Be clear about credit terms in advance. Have a written credit policy. Learn to say NO to customers over their credit period.
2. Regulate your expenses:
Spending less and saving more is another tip that can help you improve your finances. Look for suppliers who offer you the best deals. Try and take calculative risks and don’t be afraid to negotiate with your long time ongoing merchants. If your business is growing then your expenses might certainly grow however this should be in line with your expenses.
Against each expense line in your profit and loss statement assign to one member of staff. Every quarter look for 3 ideas to save on each expense item. Choose the best idea to action. In this way, you build a culture that is cost conscious.
3. Keep up with your technology:
Technology has changed the face of business finance. Crowdfunding, peer-to-peer lenders, mobile payments, bitcoin, robo-advisers – there seems to be no end to the diversity, or to the sky-high valuations, of these “fintech” innovators- The new age technology and innovation that aims to compete with traditional financial methods.
Are there new methods of lending that can help finance you? Are they different ways in which customers can pay you. Make it easy for people to do business with you. I recently offered online payments via a popular mobile wallet and it increased our sales and cash flow.
Technology can act as an accelerator to your business model. Uber, Ola, AirBnb, MakeMyTrip, Amazon have used it to disrupt their industries.
4. Keep a low Debt ratio:
There are two debt ratios that you need pay attention to, business’ debt-to-asset ratio and its debt-to-equity ratio. Also referred to as solvency ratios, these specifically measure how much your business owes versus how much your business is worth. The debt-to-asset ratio can be interpreted as the proportion of a company’s assets that are financed by debt. Maintaining a 2:1 ratio or lower is preferable for debt-to-asset ratios.
5. High Profitability ratio:
There are four main areas of financial health that should be examined: liquidity, solvency, profitability and operating efficiency. Out of the 4, the best indicator is profitability.
The best way to measure your profit margin is your profitability ratios. These are a class of financial metrics that are used to assess a business ability to generate earnings compared to its expenses and other relevant cost incurred during a specific period of time.
So, how do you measure your profit margin, take your annual net profits and divide it by your annual sales. While you may be making sales, your profit margin could still be low depending on your pricing structure, start-up cost and other factors. Your profitability ratio is considered healthy when it is on the high side. Every business is different. Try to benchmark your profitability ratio with the best in your type of business.
I used to measure the profitability per customer in my previous business and was constantly looking at means and ways in which profitability could be increased. I identified three key customer variables that could positively impact the profitability and started to work on improving one of these every year and look to make a 10-15% improvement on each variable. hence, this led to a highly profitable business.
6. Seek alternative financing:
Another point is, no matter how much of funds you have at your disposal there would a time where you would require assistance from the external sources during a financial crunch, hence there are quite a few and faster options with the increase in digitization.
Himanshu Bindal, CEO & Founder, One Internet said: …it was easy to raise the first round of angel funding, the future rounds are tougher, as entrepreneurs ideas are more scrutinized. “Startup India” plan has been progressive for the start-up industry
In conclusion, an entrepreneur knows only too well the teething problems that this line of business entails. It’s not surprising then that entrepreneurs are always on the lookout for inspiration – something that Harsh Mariwala provides in this special interview exclusively done for us.
So, how do you manage your finances? What is the best of managing finances according to you? Like, share or comment below.