It is a very important point that is overlooked by majority of small businesses cause they are busy dealing with other aspects of their business. As money is the life line of the business knowing about your financial should never be looked upon. Keeping track of your financial is not only critical for running your day to day operations but they also play a major part in taking your business one step further ( funding ).
Knowing about finances helps in a lot of aspects, you know how to price your products right, define your margins accurately, identify your cash flows, file your taxes, and prepare for the funding.
Financial Statements (P&L, Balance Sheet, Cash Flow)
- Balance sheet: As the name suggests, this balances out the two headers of the college. This will give you an overview of the financial state your business is in. The basics of it are quite simple :
Liabilities + owner’s equity = assets.
It’s called a Balance sheet because the equation should balance out. In a balance sheet Liabilities and Assets will always balance out in the end.
Assets are of two types: Current and fixed
Current Assets mean the possession or assets that can be liquidated easily in the same financial year. Current assets can be in the form of inventory, prepaid expenses and accounts receivable.
Types of current assets:
- Inventory (Stocked goods)
- Expenses already paid
- Account receivable
Current Assets: Holdings which can be liquidated in the same financial year
- Plant & Machinery
- Furniture etc,
There are two types of assets: current and fixed.
Current assets include cash or other holdings that can quickly be converted to cash within a year. These may include inventory, prepaid expenses and accounts receivable. Machinery, equipment, land, buildings, furniture and other essentials that you are not planning to sell are considered fixed assets.
- a) Short-term Liabilities b) Long term debt
Example of short term liabilities are:
- a) Account payable b) Credit Line
- c) Taxes d) Registration fees etc
Examples of Long term Liabilities:
- a) Bank Loans b) Notes payable to stockholder
- Income statement: A profit and loss statement, also referred to as an income statement, enables you to project sales and expenses and typically covers a period of a few months to a year.
Net profit = Gross Profit – Total Operating expenses
It is referred to Total sales minus the cost of goods sold.
Cost of Good is referred to the goods like raw material, inventory or payroll taxes. A small scale should also account for expenses like overheads such as repairs, utilities, insurance, consultancy fees, legal fees.
- Cash flow statement: As the name suggests, this is a statement which denotes how much cash is coming into the company and how much is flowing out of it. This statement highlights how much money is coming in to (cash inflows) and going out of (cash outflows) your business. Cash inflows include cash sales, accounts receivable collections, loans and other investments. Equipment purchased, expenses paid, inventory and other payments are considered cash outflows.
Basics of Cash out flow for MSME:
Calculate end cash balance: Beg cash balance + cash inflows – Outflow
Net Income Margin
Net Income Margin: This is the most common financial statement almost every one forgets to look. In this statement instead of measuring the Margin in terms of Rs, we measure it as a % of sale.
Net Income Margin: (Total revenue- Total expense)/Sales
Margin is the percentage of Rs. We are earning per dollar. This is a very important point to consider because margin not dollars defines the efficiency of business e.g. you sell 100 Rs. worth products with an expense of 80 Rs and your net margin is 20%.
Consider you have sold 10000 Rs worth of product this month and your profit is 1000 Rs and there is a second business which sells products worth Rs. 5000 and makes a profit of 1000 Rs. As we can clearly see that the second business is a reliable and safe business to operate as it has high Net income margin.
As it is quite evident that the expense and over heads of the first business are quite large so as soon as the company’s sales dwindle the company soon becomes unprofitable but that’s not the case with the second company owing to its high Net income margins. This should be always viewed as a risk management option for a small scale company.
- Revenue growth
One important thing Small entrepreneurs miss out on is keeping track of their revenue growth. More revenue means more leverage to bring up your net profit margin. If you warn more revenue then you have a scope for more expenses which in turns supports the growth of the company.
We have to proactively track our revenue. Revenue growth is measured in reference to last year’s growth. If there is growth but still decline in sales from previous year eg. For FY 2015-16 the revenue growth was 80% and in FY 2014-15 it was 120%, we have to sit back and find the reason for the sales drop. We have to proactively keep our eyes on the Revenue. We can also measure it time to time in terms of Quarter, Months, and Weeks etc.
All these statements are quite straightforward but very important for running business. If a small business manages his cash flows well, keeps a good Net margin and proactively tracks his revenue growth, there is a little doubt on his success as a Small scale Entrepreneur.