Hope the previous article (click here to read) has clarified the difference between Accounts and finance and its relevance in core operations.
Taking cue from there, let's see how every operation can be reflected in financial perspective and why it is important for entrepreneurs to take a close look of their business through the financial lens:
To start any business you need capital – finance
To market your product or service you need to spend money – finance
To execute your orders you need to procure material or resources – finance
Thus, every single operation of business involves a financial perspective. Therefore it is imperative to understand how this financial perspective can make or break a business.
Business put in simple financial perspective is nothing but a cycle of investing money in products or services and getting a return in the form of profits. What if this investment is not on the right track. Will there be profit? To know whether we are treading the right path, every entrepreneur needs to check and analyse every operation every month purely from a monetary or financial perspective.
Sales :
Analyse the impact of discounts or offers given on actual increase in sales.
Check whether billing has happened in accordance with the discounts and offers.
An error in billing can cut your profits.
Analyse how different customers have responded to the discounts and offers and what has been the impact on the sales(purchase?) composition of customers
Purchase:
Is there a change in material/ resource price and have you considered its impact on pricing your products or services
Is payment to the vendor made as per the credit period
Is there a differential pricing that you get from different vendors
Are you dependent on the very limited base of vendors
Production:
Check your input and output ratio in financial numbers. The actual wastage should not exceed the normal wastage
Check whether scrap is getting accounted for properly.
Check how many final products fail the quality test and have to be scrapped or reworked. The cost of these will tell you the efficiency of the production/ servicing department
Inventory:
Check whether you are overstocked, understocked, or optimally stocked. This will help you release excess money if any is blocked therein
Check if there are any items that have not been used for months, and yet continue getting purchased. Try to get these liquidated
It is very evident from the above that if every operation is viewed thru a monetary perspective, inefficiencies - existing and futuristic can be dealt with effectively and profitability and cash surplus can improve significantly.
The exercise or analysis given in each operation does not require too much effort and can be easily done on an excel sheet using simple, calculations.
Today, with digitalization, there is a plethora of software available at very reasonable costs. It is strongly recommended that however small a business may be, getting authentic information on operations is key for decision-making and therefore the need for an automated information system.
You can choose the type of system based on the nature of your business, budget, and compatibility with any other software that you may be already using.
So get your financial lens today and stay tuned for more interesting concepts around finance and its business relevance.
Synopsis:
Entrepreneurs may often be reviewing their business with their operations team, but how many really get the performance translated into financial numbers? At the end of the day everyone is doing business to for getting optimum profit and surplus, and it is possible only by adopting a monetised approach and putting a financial number to the operations. It becomes an eye-opener for most of them when the same operation is reflected in monetary terms.
Let me give you that financial lens…
In case you wish to connect with us for a better explanation, do email us: dipali.deshmukh@maxentra.in
We provide time-tested solutions in Business Consultancy, Virtual CFO Services, Business Mentoring, Startup Mentoring, and also in helping you procuring finance from banks and other financial institutions. We are also experts in guiding you through several schemes by the Government of India and Maharashtra.
Do read the next article on Operational Efficiency and Profitability
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