Easy Financial Management for Entrepreneurs

Hi all

Most of your firms/companies/ propreitorships/ must have entered their Q4 of FY 2010. If this is the second year of your business, you probably know what all to have ready to audit your respective financial statements. But if you had started your business in the last 9-10 months, There is just about enough time to consolidate all your bills and payments to prepare a draft of financial statements.

A little organiation and monitoring and a little knowledge about financial statements could stop some bucks from going into your CA's pockets. As I sat to have a look at all the transactions our business had gone through, I found things going a bit out of hand myself. Nevertheless I managed to get hold of them and organize them the right way. Most of you would be using Xero or Freshbooks to manage them online. I just wanted to test if some patience can get you work on spreadsheets yourself. The idea is not to make you break your nerves over accounting principles. Rather it is to make you sit one day and take note what your business has actually done this year.

While doing this to my own business, I thought I can share somethings with you all as well as try to scare out the fear of finance from some of you. Lets have some short sessions in basic financial management for your business.

If Financial manager is a word that brings a top notch MBA guy who demands a seven figure salary and speaks in some intimidating language, I request you all to forget him for some time. I shall prove to you that you have been the financial managers of your own businessesall through in their nascent stages. Remember that glorious day you spent with your dear core team when "THE IDEA" traced out its first clients. Some thoughts in all of your minds would have been :
1) How much do we have to spend from our own packets initially?
2) Do we have sufficient savings? How long will they be sufficient? What after that?
3) Who will give us the initial or intermediate capital?
4) Does that give want a Share of your business? Or can you bid him good bye in future after returning his money with due interest?

Did you pass these questions and find the answers? Lo, you have performed the first act of a financial manager. You took the "Financing Decision" for your business.

You have probably convinced your parents/spouse or that angel uncle or aunt to lend you some money. Their probable suggestion would have been, "This money would have given us so much return had we put it away in the Bank. But I am readyto support you. So take it." You would have fought down a strong impulse to say "Wait and see I am going to give you back more that double the amount of interest your bank would have paid you." Sentiments apart. Your people might be ready to pardon off the interest expectation, but FM (Financial Management) does not. If 8 percent is the prevailing bank rate and you've taken one lakh from your parents/spouse, Rs 8000 is the minimum interest expense you incur for the year. A professional lender's expectations would be much above the bank rates. But finally, you've got the amount of capital, which you would from here on refer to as "Debt".

You and your team members must have also pooled in your own money. You dont expect the capital back and are willing to wait patiently before your business starts overtaking the Banks and mutual funds. But, your Business is not You. It is just a system which aims to buy something at some price, add value to it and sell it at a higher price. It is obliged to hand you over the difference at the end. If it is not capable of same, you mostly wont be putting your money into it. There comes the key financial goal : returning to shareholders or Share Holder value Maximiation. This is one thing around which the whole monster of FM revolves.

Coming back to proving that you are a financial manager yourself. Yeah you got the money. You are all set to start off. You spend an excited sleepless night on the friday, waiting for it to dawn and are soon with your team on the morning of saturday. Your good team has come up with a list of 'things' to buy with that money. Software licenses, some hardware, some components, some space (??? I mean office space), some stationery and the list goes on? It is time for you all to go to your SP Roads, Avenue roads, Chickpets, crawford markets, Metros and other wholesale places for your 'business shopping'.

There must be some inborn managers among you who preferred to do some 'window' shopping and collect all the quotes and then manage to negotiate the best quote possible for the purchase. If you are  a guy, you might be finding yourself bargaining for the first time in life as well as enjoying it!! Finally you are ready with the final list of your components/hardware/software with best possible prices you could get. Congratulations Pal, you just performed the second function of FM. The INVESTMENT DECISION. he decision of how to invest the capital in such a way that it helps generate maximum revenue. The considerations like location of office space, license version of the software or the functionalities of hardware, all exert a significant influence over your revenue generating capacity in future.

"Hold on! were you going to tell us how to make our own financial statement drafts before we go to our CA?" I do hear your murmurs. But it was necessary to show you the inborn financial manager that you are. OK Coming back to preparing our financial statements. Again for some gyan here (Yaawwnn!??! I'll be brief)

Auditing needs three types of financial statements

The Balance Sheet
The Income statement or Profit/Loss Statement
The Cash Flow statements

Balance sheet starts from the day one of your business. It is just the snapshot of what your business has today against what it owes you and other shareholders as well as those who have given you loans.

The Balance sheet Equation is simple

Assets = Liabilities + Owners Equity

Simply put, lets go back yo the day you made your financing decision and got the required capital. Suppose your capital required was Rs. 5,00,000. You managed to pool up Rs. 3,50,000 from yourself and your core team of shareholders and remaining money was lent by your wife and a trusted friend. At that moment, your balance sheet would have looked like:


Assets - Cash (Rs. 5,00,000)
Liabilities - Debt (Wife - Rs.1,00,000, Friend - Rs.50,000 - Total Rs. 1,50,000)
Owner's Equity - Total - Rs. 3,50,000 (member one --,...)

After your second function of Investment decisions,after buying probably some furniture for Rs. 1,00,000, renting the office space for an year for say Rs. 2,00,000 and buying some stationery for Rs. 25,000, the balance sheet would have looked like:

Assets - Leases (Rs. 2,00,000) Furniture (Rs. 1,00,000) stationery (Rs. 25,000) Cash ( Rs. 1,75,000) Total - Rs.5,00,000
Liabilities - Debt (Wife - Rs.1,00,000, Friend - Rs.50,000 - Total Rs. 1,50,000)
Owner's Equity - Total - Rs. 3,50,000 (member one --,...)

(to be contd.)