Financial Transformation in small business
Financial Transformation in small business
Inculcating financial disciplines for positive impact on profitable growth.
As a small business consultant specializing in transforming business processes, I firmly believe that accounting and finance management are crucial to any successful business. My services aim to provide business owners with clear financial data, enabling them to make informed decisions and create a cost-conscious culture. This financial awareness ultimately drives their business toward profitable growth.
Based on my consulting experience with small businesses, I have identified several common challenges companies face in essential finance management.
Challenges in Financial Management in small business
Lack of transparency in financial data to the business head:
Sometimes, business owners face a situation where they are not provided with clear and concise financial data that relates to their expenses categorized by sales, receivables, and payables. This can lead to a lack of understanding about the business’s financial health, resulting in uninformed decision-making.
While managing other business priorities, financial management may sometimes be overlooked:
This challenge arises when financial management takes a backseat to operational concerns and growth initiatives, failing to prioritize financial stability and control in the overall business strategy.
Absence of variance analysis report:
The financial statements and reports are presented to the business head without any variance analysis regarding sales or the previous month. This situation does not trigger any actions from management or sometimes leads to confusion and frustration.
Lack of financial planning to manage current and future growth:
Developing a comprehensive financial plan that considers the business’s growth over the next one to three years is important. This plan should include investment decisions, funding methods, projections for working capital or cash flow requirements, and projections for profit.
Failure to plan appropriately can lead to difficulties in managing growth and create a struggle between survival and growth aspirations for businesses.
Finding difficulty in accessing capital:
This challenge pertains to the difficulty of securing funding from external sources, such as banks or investors, and the lack of internal resources available for investment. These limitations can hinder a business’s ability to grow and succeed.
Inaccurate financial forecasts:
This challenge arises when the business makes errors in predicting future financial performance and market trends due to a lack of reliable data or budgeting methodologies. This can lead to poor decision-making and financial instability.
Excessive fixed asset investment:
This situation occurs when a business invests heavily in long-term assets without considering short-term liquidity needs or other financial priorities. This can lead to financial strain, mainly when predicted growth does not materialize.
Lack of working capital management:
This challenge relates to inadequate cash flow, inventory, and accounts receivable/payable management. Neglecting these aspects can result in operational difficulties and impede business growth, ultimately jeopardizing long-term prospects.
Solutions to overcome challenges in Financial Management Processes in small business
In response to the identified challenges, i help the business owners to implement some of the basic financial processes.
- Streamlining the Profit & Loss Statement
The Profit and Loss (P&L) statement is a crucial financial report for any business. It shows how much money a company has made or lost at a given point in time. However, many small business owners find it challenging to read and interpret these statements, even with the help of software. That’s why I’ve customized a simplified P&L format for any business. This format makes it easy for business owners to understand their expenses concerning sales and compare their finances to previous months or timelines.
I’ve also encouraged businesses to make P&L analysis a monthly ritual rather than an annual compliance task. This simplified version of the P&L statement has helped many business owners, especially those without a finance background, to quickly interpret their finances and make informed decisions.
By regularly reviewing their P&L statement, business owners can identify trends and areas for improvement. For example, are certain expenses consistently higher than expected? Are there opportunities to generate more revenue? By asking and answering these questions, businesses can optimize their finances and take action to improve their profitability.
One way to take P&L analysis a step further is to create P&L forecasts for different scenarios in the upcoming periods. This could be done on a quarterly or monthly basis. By forecasting profitability, businesses can gain visibility into their financial health and take proactive measures to improve it.
- Bringing visibility to working capital Management:
Working capital is crucial for any business as it covers day-to-day expenses and keeps operations running smoothly. Effective working capital management involves managing assets and liabilities to maximize cash flow and minimize financial risk.
I bring visibility to payables and receivables at any time with a simple and powerful Management Information System (MIS) that indicates the balance of payables and receivables at any time.
I also help establish a forum between commercial, finance, and business heads to communicate the data seamlessly and review mechanisms. My clients use this simple approach every week and reduce the working capital cycle by 30%.
Another area of working capital management I help the organization with is structurally designing the inventory management system for Raw Materials (RM), Work-in-Progress (WIP), and Finished Goods (FG). In the case of raw material inventory, I focus on redesigning supply chain strategies such as vendor selection and location to ensure reliability on quality and delivery commitments, lead time reduction, challenging and reducing the minimum order quantity, improving communication on forecasting, and vendor relationship practices. These strategies are crucial in reducing raw material inventory.
Similarly, in the case of work-in-progress inventory, I focus more on eliminating or reducing the imbalance between processes through structured line balancing on capacity and scheduling and waste elimination in critical processes. This helps to reduce the work-in-progress inventory. By establishing the right inventory management system, one of my clients reduced the working capital held in inventory by more than 54% within three months of implementation.
- Driving cost optimization Initiatives:
Cost optimization involves more than just cutting expenses. It is about maximizing the value and efficiency of every aspect of your business. To achieve this, the organization must carefully examine every line item on its profit and loss statement and identify areas where waste can be reduced, processes can be improved, or contracts can be renegotiated for better terms.
In my approach to financial transformation, I focus on driving holistic cost optimization across the entire value chain. I have developed a comprehensive cost-saving approach to materials and processes that can be easily implemented once the methodologies are taught to the people.
For some clients, cost savings have become a cultural norm, helping their businesses weather the COVID-19 crisis.
Streamlining the Cost Estimation Process:
One of the main reasons many organizations suffer losses is underquoting or losing potential orders due to overquoting. I have observed that small business owners often use thumb rules or rely on market trends to estimate costs, which is inefficient.
To address this issue, I worked with a business head to implement a transparent, up-to-date, and realistic costing system in one of my clients. We simplified the costing process using existing profit and loss data and structured costs into material costs, direct expenses in manufacturing, indirect expenses in other functions or overheads, and finance costs in terms of sales. We collected and updated the information every month, which helped the business head to track expenses regularly with respect to sales and use the updated data for accurate product cost estimation during quote preparation.
As a result, one of our clients reduced their quote preparation time from 5 days to 2 days. Additionally, other clients could secure sales orders by scientifically arriving at the cost and negotiating with the customer.
Results of inculcating financial management process in small business
- Profitability improvement despite low turnover growth: In one of my long serving clients have registered 2% growth in sales turnover due to slowdown in industry growth, however, they shown 15% net profit, which is double their previous year net profitability. The bottom line growth despite low sales turnover was made possible due to the culture of cost optimization drive throughout the organization.
- Inculcating the culture of cost consciousness among the team: The successful integration of process like profit and loss analysis every month along with functional heads, identifying cost opportunities in design, materials, procurement, manufacturing processes lead to the culture of cost consciousness among the team irrespective of sales growth.
Testimonials from satisfied clients!
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