Why is it Necessary for Small Businesses to Manage Finances Well?

Why is it Necessary for Small Businesses to Manage Finances Well?

Start ups are the new trend..Or at least we can say that the term has made it more attractive. People across all age groups have start ups. This trend has been growing, especially in India, at a rapid rate, for the past few years. Although the rate of growth has declined but in absolute values, the number of start ups are increasing each year. However, what’s interesting to know is that more than 50% of these start ups fail in their first four years of operation. Here, we are going to be talking about stat ups by individuals and not big firms.

About 82% of the start ups started by individuals are either self financed or use a majority of their finances from friends and relatives. This means that finances are limited. One of the many important reasons for failure of mot just start ups but also small businesses, is lack of Financial Management.

No matter how good your business idea is and how much finance you have to begin with, lack of financial management will drain your finances eventually and lead to failure. So here are a few ways small businesses can manage their finances well:

 

  • Budgeting: Whether you have a lakh or a crore, it is vital to budget your money and allocate funds in an appropriate manner to all aspects of business. It involves consideration of expected and unexpected expenses with the given financial strength of the business. This will ensure saving and distribution of funds to areas that need more attention. For instance, marketing plays an important role for any small business, budgeting will further allow channelizing of funds in different areas such as print, digital and radio.

 

  • Cash Flow Management and Expenditure: Having track of your cash in had is of utmost importance.This enables small businesses to keep track of their day to day expenses and locate excess expenditure. It will further help cut down on expenses and increase savings, one day at a time. With that it also helps you analyze your funding sources and look for better alternatives. Cash flow Management on a day to day basis keeps your budget from exceeding . Although a small thing, this will help businesses to prevent from default of bills, rent, utilities and creditor payments, thereby creating a good image.

 

  • Tax Planning: With any business, big or small, comes tax payments. This is an integral part of running a business. Hence, tax planning is essential for financial management. It helps keep businesses aware of the amount of tax to be paid, given new reforms, or changes (GST). This will also prevent tax default. Another important reason for tax planning is that it helps buy or sell assets or other instruments essential for the business and give the business tax benefits, thereby saving money. Every country has strict laws and people who work around them. Small businesses must use this to their financial advantage.

Now that we understand how to do financial management, it is imperative that we focus on how to utilize it to our benefit. Keeping financial management records will enable small businesses to identify trends in sales, give a clear view on the autonomous (minimum/ absolutely necessary) expenses in the business, signs of financial distress or downturn and measure business growth over a period of time. All of these will enable small business to get a clear view of their business, understand its trends and therefore capitalize on them. Strong financials or at least a clear understanding will also enable the owner to list down ways of financing the business in the future and give the lenders the confidence to invest in them, be it banks or other financial institutions, private lenders or even family and friends. Better financing will indicate business trust that has developed among people, thereby creating a good reputation for small businesses. This becomes an important stepping stone for small businesses to grow in the future.

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