Deepali Rohra highlights five common financial mistakes and ways to avoid them
Today business comes with many risks; some of them can seriously affect your financials adversely if not addressed timely. Poor decisions, lack of processes and need of financial understanding could lead to considerable strain on the business. Therefore, you need to walk a fine line of preserving cash and being as creative as possible to move the business forward. Management must tactfully avoid these five common-but-harmful financial mistakes.
It is important to pay taxes and all other statutory dues in a timely manner. Delay in such payments could be one of the reasons for scrutiny. The statutory records should be reconciled with the books of accounts to avoid last minute surprises and to ensure all due credits are taken in time. The delayed payment may incur interest and penalty to the business owners. Further, the unpaid taxes may accumulate to such an extent that it may be impossible for the businessperson to make the payments without significantly affecting the cash position.
Small business owners need to understand the difference between tax evasion and tax planning. Tax evasion is illegal and is the act of deliberately avoiding taxes by not reporting income and expenses and failing to pay taxes. Tax planning is a legal way to minimize taxes by taking advantage of methods in the tax code, such as credits and deductions that can protect income from taxes.
Traditional Approach instead of Digitalization
We have seen accountants and admin staff working in companies, in the same profile for years, and are averse to any change. With the advent of new technology, the dynamics have changed. What can take days or months for a traditional approach can be done in a matter of minutes. The new technology in automating tasks has made things possible and very much affordable. Repetitive and routine tasks can be automated; this helps in reducing the time to do the task and brings in a lot of accuracy and control. Now even SMEs can do a lot of automation of tasks and that too at a cheap and affordable price. Employee development in terms of soft skills and technical knowledge is the essence for growth.
Ignoring your credit score
Not paying the EMI and using the money in business may seem a good option especially when the business is expected to grow exponentially. This is often the practice in cyclical type of business, where the entity is in shortage of funds and often resorts to delayed payment or non-payment of EMIs. This affects the credit score. A good credit score can help you save a lot of money in interest rates. The better your credit score is, the easier it is to get higher loan amounts, and even a better rate of interest. You should check your credit score every six months or so and make amends by spending wisely and paying the EMIs on time. This can result in substantial savings in terms of interest costs. Banks are willing to extend credit lines to customers with good credit score at reduced interest rates.
Monitoring Progress
The budgeting process helps to take timely corrective action in cases of under-achievement of income or excessive expenditure. Thus, budget helps to ascertain that business money is being spent and invested correctly, and the financial goals of the business are achieved. The best practice would be to have a budget plan and review the actuals as against the budget on a monthly basis. This should be ideally done by the fifth working day of the month so as to take
The columnist is a Partner at Firstpoint Advisors LLP. Email:deepali.rohra@firstpointllp.com
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corrective actions immediately and thus save on further losses. Again, this should be preferably done sector wise, location-wise and product wise. This will help identify non-performing sectors/products/ location and appropriate timely decisions can be taken.
Over/ Under Leveraging
The strategic use of debt as a leverage has many advantages for business. These include enhanced returns, larger capital and ability to better manage cash flow. However, excess leverage can lead to financial problems including encumbered assets, high-interest expense and increased fixed costs. Accordingly, selecting the optimum leverage ratio is an important calculation for management. The determination of leverage will depend on the risk appetite of owners (Management), the cost of capital (WACC = Weighted Average Cost of Capital), cost of debt funds, type of business (cyclical, non-cyclical). If a company has too much equity financing, it will have a larger cost of capital as outside shareholders will expect returns. However, if it has too much debt financing, its cost of capital will rise because of the increasing financial risk. Accordingly, a leverage ratio in the middle will minimize the cost of capital, allow for corporate growth and not be burdensome to the company. The task is to identify the right leverage ratio and there is no one formula which fits all.
The columnist is a Partner at Firstpoint Advisors LLP. Email:deepali.rohra@firstpointllp.com
