Planning for the medium term for your business? Ideas to strengthen your financial foundationBack
12 Apr 2021, 09:57 — 5 min read
The past year has been one of challenges. As entrepreneurs we have accepted willingly the fact that we are in for a roller coaster ride. Our view is that if we manage cash flows well at a business level and personal level, things are relatively easier.
Let us start with the fundamental discipline of cash flow management.
1. Have a reserve of 12 months for fixed expenses at a business level
Fixed expenses include rent, salaries. To share an example, if the rent is 40,000 rupees per month and your expansion has salaries of 2 lakhs a month, approximately 30 lakhs need to be with you if the venture were not to succeed at doing any sale.
That said, it depends on the industry. If it is a B2B, one needs more reserves as the cash-to-cash cycle is longer. For B2C, if one has reserves of around 8-10 months it is generally considered sufficient. That said there are no rules cast in stone. It depends on the cyclicality of the Industry. If it is cyclical or a B2B, sometimes 24 months is more apt for the situation. In the current Covid situation, 24 months seems to be a more appropriate benchmark for business planning.
A good entrepreneur matches the short term and the long term well. As Master Yoda said in Star Wars 'Do or do not. There is no try'. There are no parachutes in this journey.
2. Improve collections
The prudent practice today has been to take advances wherever possible. This is so on account of inventory lying in the warehouse or in the factory godown as even finalised orders has been backed out of post Covid and goods have had to be sold at a deep discount.
3. Re-evaluate Business Models
Many businesses, especially traditional businesses, have seen their business models as rendered flawed by the force of time. Even established businesses have had to look at the intersection of desirability, feasibility and viability and come up with new and sustainable solutions at an operating level. Many have had to come up with viable modes or alternatives which fit with the digital way of working.
4. Look at long term contracts carefully
This is equally relevant for B2B as well as B2C businesses. This approach helps to separate the long term stakeholders and short term stakeholders. That said a win-win approach is more advisable even if you are not a large corporation, as it lays the foundation for long term growth.
5. Invest in Marketing
Most SMEs do not have a structured approach to marketing. This adhoc approach is detrimental to the long term growth in business. It may not be big spends, however it needs to be carefully thought out.
What about personal finances?
1. Separate personal finances from business side
Most entrepreneurs make the mistake of not drawing market driven salaries. This also results in a mental block to pay people more than what you draw. This also leads to bottlenecks in form of one doing multiple jobs. A buffer of personal finances also results in an ability to tide over the crisis of a century.
2. Keep minimal personal liabilities
Low level of liabilities results in the courage and capacity to experiment with business models. This approach has been the cornerstone of growth for many growing companies.
3. Know yourself
It is important to understand one’s conditioning and consider opening up of possibilities at the stage of one’s thought. That is the starting point of financial awareness. At this stage it is important to consider and experiment before you decide you are an investor or a trader.
A good entrepreneur matches the short term and the long term well. However it is possible only on the back of a strong personal financial foundation. As Master Yoda said in Star Wars 'Do or do not. There is no try'. There are no parachutes in this journey.
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Posted byAnirudh Anand Gupta
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