Learn how to do finances if you want to be your own boss

Delegating the financial affairs of your SME to someone else will not help your company grow. Instead, entrepreneurs must get on top of their finances to ensure their ventures succeed.

Let’s face it, accounting and finance aren’t everyone’s favourite topic. The reasons are simple. There is the perception of too much jargon, fearsome concepts and complex formulas – and most people hate dealing with numbers.

Luckily finance is not at all what many make it out to be. You don’t need to study debits and credits or be a whiz at maths, or even an expert in International Financial Reporting Standards. But this huge disconnect between perception and reality and the resulting financial illiteracy is the major reason why so many small and medium enterprises fail.

To start and run a successful SME, you of course need a brilliant idea. But a great idea alone is not enough; you need people, processes, a sales and marketing plan, and proper financial management. Finance is critical for the survival of any small business and essential knowledge for anyone running that SME.

To begin with, a business plan is critical. But the key parts of a plan are the cash-flow and profitability projections and the funding plan. If you don’t get these right – that is, the right amount and type of funding at the right time – you will quickly run out of cash. And a realistic plan may be a rude awakening; your sales will grow far slower than you thought. Also, your expenses will stay flat or rise. Hence you must be fully aware of, and fund, the gap between cash inflows (from sales) and cash outflows (expenses such as rent, salaries, advertising etc.)

Fast forward and assume you’ve survived until, say, year two.

The issues pile up, such as in sales and receivables. How do you price your service or product to give you a decent margin? (Hint: you should know your costs.) How much credit do you give your clients? (Clue: look at your cash-flow forecast.) How much is collectable from customers and when? (Read your balance sheet.)

Then there are the matters related to expenses and payables. How much is payable to suppliers and when? Does the SME have enough to pay the bills when they are due? (Hint: Look at your balance sheet and the cash flow forecast.)

Of course the SME is not a charity, so you need to know how profitable the business is. And if you are in the red, why are you bleeding money? What costs are fixed, what are variable and what can you cut? (Look at the income statement). Or your short-term goal may be just to survive, with a no-profit-no-loss objective. Here you must know your SME’s break-even point.

Fast forward again to year five. Now you are a stable, profitable business. But you want funding, not for survival but for growth, and you approach some investors. The first things they will want to know are the revenues, profits and cash flows for the past five years.

For this you need to show them the audited financial statements from inception. So book-keeping becomes essential and not an afterthought. And what I mean is an accountant and a simple accounting software from day one, not a garbled Excel sheet and a bunch of loose bills in your drawer.

An often-forgotten yet key upside if you keep proper books and get them audited is that you reduce the risk of fraud; if your business has a significant amount of cash receipts this is a big risk.

But then you might wail: “Yes I am the chief executive, but I am a completely non-finance person. How can I train myself and my staff on all this? Why don’t I leave this to someone else?”

Well, in a SME you have to wear many hats – chief executive, chief financial officer, chief human resource officer, chief marketing officer, chief intelligence officer, etc. You can’t delegate financial management to the chief financial officer because you are the chief financial officer.

Plus, you don’t need to be an expert in finance. You just need to know whether your business is doing well financially and what must be done to improve the finances.

There are many learning options and it all depends on how much time you have, your budget and you style of learning. You could attend a short live course on the basics of finance, talk to someone who is an expert and get some useful tips, or pick up one of the many books in the market on finance for non-finance managers. Personally I prefer a live training session – it’s far more interactive, insightful and effective.

So stay on top of your finances. And lead your business to success.

Binod Shankar is a chartered accountant and CFA charter holder. He is the managing director of Genesis Institute, a leading financial training company

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