Opinion • Dec 01, 2021
How Can MSMEs Develop and Maintain Financial Discipline?
Indian MSMEs are becoming globally competitive and employ around 11 crore people. As powerhouses of the Indian economy, it is no doubt that MSMEs need to be nurtured and helped to scale to the next level. While there are different government schemes and incentives in various areas, proper guidance in the area of finances is often missing. Financial discipline is not only about getting the numbers right. It is a complete process of planning, implementation, analysing variances and taking appropriate corrective and preventive action.
So how can MSMEs develop and maintain financial discipline, and what are the areas to focus on? Below are some pointers from VPSPL, the leading company offering reliable VCFO services in India.
1) Budgeting and forecasting
Budgeting is the process of understanding how much money is on the table, how much has been spent and what is required for the future.
Financial forecasting is the process of preparing detailed projection statements of expected revenues. This helps to set future expectations based on the present scenario and plan on the business strategy.
By understanding the budgeting and forecasting principles, preparing a plan and adhering to the same, MSMEs can improve their credit ratings and gain sufficient surplus to reinvest in R&D and other initiatives.
2) Analysing financial trends
Data is the new king, and the best way to understand business performance is to take stock of key metrics that impact the business and watch how they perform over set time periods. This will also give an idea of any seasonal impacts on the business, unnecessary expenditures and other areas to focus on optimising the business operations.
Analysing financial trends also helps a business to make confident decisions, undertake bigger projects and ensure all commitments are met at all times.
3) Cash flow management
Cash management is a broad topic that deals with how the company tracks the money coming in and the money going out (be it in expenses or investments). A company needs good cash flow to survive, fund ongoing operations, invest, grow and prepare for the future.
By analysing factors affecting cash flow, a company can concentrate on optimising those aspects that can help improve its situation.
4) Vendor management (receivables and payables management)
Vendor management is a subset of cashflow management and is more at a business strategy level. By understanding the receivables and payables, the specific terms involved and how it is working on the ground, a business can take proactive steps to optimise and streamline various areas.
Further, any opportunities like discounts on upfront payment can also be capitalised on, thereby adding strength to the overall business operations.
Conclusion
Financial discipline is a great tool that will help MSMEs unlock the rewards of their hard work and help them grow to the next level. With realistic budgets, sound financial principles and proper tracking, the sky is the limit for growth and achievement.