While the funding gap is one of the many challenges MSMEs face despite their potential, internal financial planning and management is another aspect where many MSMEs fail — which can make a real difference in success and growth.
With proper financial planning, businesses can balance the inflow and outflow of funds even when the market is adverse and volatile. Else there is a high probability of loss of business opportunities, income loss, and even business closure. And it is not common for businesses to witness such a situation.
As a business operator, you must be ready to face contingent situations like accidents, strikes, and recession — that’s another area where financial planning helps to successfully navigate complex business and financial landscapes, make wise decisions, and experience sustained growth.
When finances are under your control and you have a cash surplus, you can grasp many opportunities as well:
- Add new lines of business or products
- Reinvest to streamline business operations for further efficiency
- Make investments to make passive income (but don’t get too tempted by this unless you do all the math)
- Expand business into new territory
- Stock raw materials when available at cheaper prices
Let us delve into some examples that highlight the objective and importance of financial management for MSMEs:
Resource Allocation: MSMEs can efficiently employ their limited resources if they practice solid financial management. For instance, a small manufacturing business can make price and sourcing decisions, select the appropriate production levels, and manage stocks effectively using financial data and analysis.
This ensures that resources are utilized effectively, cutting down on waste and increasing revenues.
Cash Flow Management: It can be difficult for businesses to maintain a constant cash flow. By implementing effective financial control techniques, even a small retail company may ensure that it has enough cash on hand to cover its ongoing costs, make on-time supplier payments, and manage seasonal sales swings. As a result, they are better able to manage their company’s finances and have more room for expansion.
Access to Funding: MSMEs in Nepal face difficulty obtaining additional financing due to several problems, including insufficient collateral and bad credit history.
However, employing good money management strategies can improve their chances of obtaining more financial services. For example, an IT company can develop a thorough business plan, accurate financial projections, and strong financial controls to entice investors or secure financing from financial institutions. Due to their financial transparency and management, they are more credible and have simpler access to funding.
Risk Reduction: Financial management can help MSMEs avoid significant financial risks and challenges by supporting them in identifying and mitigating risks. For MSMEs, volatile markets, economic fluctuations, changes in business regulations, and compliance issues are common business risks and challenges.
For risk management and financial stability, diversify your product offerings and customer base, stay updated with regulatory changes, and maintain a (emergency) fund. Don’t forget to monitor market trends and shifts, build strong relationships with customers and suppliers, and implement robust compliance processes.
With diversification, you won’t have to rely on a single market or customer segment. Contingency funds will help you mitigate financial challenges during unforeseen circumstances.
For instance, to lessen the consequences of natural disasters, price fluctuations, or shifts in consumer demand, an agricultural firm can use risk management techniques including crop insurance, product diversification, and market trend and price monitoring.
Improve profitability: Any business organization’s primary priority is profitability, which solely depends on how well the organization uses its resources. Financial management helps to increase the profitability of the company by using effective financial control tools including cost-volume-profit analysis, ratio and trend analysis, and budgetary control.
A small tourism company in Nepal, for instance, can evaluate its financial performance, look at investment opportunities, and develop plans to grow into new markets or offer new services. As a result, MSMEs can increase their market share and seize expansion opportunities.
Proper mobilization: Managing finances is essential for any business. Financial managers must assess the allocation and use of various capital and make crucial judgments.
Whether investing in stocks, goods, or small businesses, all the important elements must be taken into account. Implementing different financing options will help the company deploy resources effectively and strengthen its overall financial position.
Elements of Financial Management
Let’s dive into the three primary elements of financial management.
Financial Planning: Setting both short and long-term financial goals for your business is part of financial planning. It includes projecting sales, evaluating costs, and creating plans to reach financial goals. To achieve proper financial planning, you need to address the following fundamental questions:
- Do you have definite business aims and goals?
- What are your brand’s long-term goals?
- What kind of funding is necessary for the organization to survive?
- What distinct rules and policies do you have in your company?
Financial Control: Financial control involves ensuring that the business can meet its objectives. Usually, several financial tools, including risk management, financial forecasting, profit and cost controls, and others, are used to achieve this.
Financial Decision-Making: Choosing the right debt-to-equity ratio for a company’s operations and capital investments sets the starting point of all financial decisions. Thus, decision-makers should assess finance, resource allocations, profit distributions, and other issues after having a good plan and a solid grasp of all the financial factors.
Technology for Financial management: Technology streamlines processes, reduces costs, improves accuracy, and provides real-time insights into financial performance. Accounting software and cloud-based solutions are a few ways you can use tech to improve efficiency, accuracy, and control over your business’s financial processes.
Functions of Financial Management
Most of the financial plans and decision making is done by top-level management such as financial managers or other core management teams. Here are some of the important functions that are carried out by this team.
Capital Estimation: A financial manager must determine how much capital the organization needs. This will cover anticipated costs, revenues, plans, and anticipated losses.
Determining the Optimal Capital Structure: After the completion of capital estimation, you need to determine the optimal capital structure. Here, you need to examine both short-term and long-term debt, considering the company’s capital as well as any external funds raised.
Choice of Funds: The capital structure must be expanded when sizable sums of money are needed. The company has several alternatives, including issuing shares of stock and debt obligations. It is crucial to assess these possibilities in light of the applicable interest rates, returns, and risks.
Investments: The company cannot simply hoard funds or profits. For sustainable growth, generating revenue is more important. The financial manager must allocate funds to successful businesses or make investments that provide appropriate returns with a safe investment.
Allocating Profits: Profit distribution has a significant impact. It’s crucial to allocate profits effectively after your business starts to make money. The following aspects employee bonuses, dividends, investor returns, funding for future expansion, and other fundamental cash flows should be taken into account. Planning and allocating profits is critical to achieving corporate goals.
Cash Management: The financial management is responsible for managing cash. From managing employee salaries to utility bills and several other recurring daily and monthly administrative expenses, make sure the finance department is proactive and responsible.
Finance Controls: The finance manager is responsible for budgeting, allocating funds, and controlling all financial matters in the short- and long term. Financial forecasting, ratio analysis, cost-cutting, and profit-control techniques can all be used for finance control.
Tips for financial management for businesses
If you are planning to start a new business or expand and whether you are a small or medium business, ask these questions to yourself before jumping to the decision.
- How much capital/initial investment by the business plan will require?
- Did I plan all the hidden costs?
- Where will the initial investment come from?
- If I have to borrow, what are the alternatives and what is the most efficient borrowing alternative?
- Consider interest rates. Remember just because you struggle to get a bank loan, don’t end up raising high-interest-rate funds from informal channels.
- Consider relationships. Don’t borrow from friends and relatives unless you are really sure to repay them back timely. It’s a catch but think. You might lose both money and friends and relatives.
- What is your current cash position?
- Remember profits don’t equal cash flow. Learn what they mean.
- Also remember, Personal finance doesn’t equal business finance. Don’t mix them up.
- Will you make enough cash flow to pay monthly recurring expenses such as rent and salaries and administrative expenses?
- Bootstrap: what are my cost-cutting alternatives? — How much will the annual rent be? Should I choose a co-working facility or a small office space or should I work from home? Will I require all that furniture in the early days? Do I require a marketing agency or should I work on social media marketing on my own during the early years or get support from friends? How and where do I leverage technology?
