MSME Entrepreneurs

10 Benefits of knowing the balance sheet for MSME Entrepreneurs

It is important that the small business owners should focus a bit on understanding the nature of balance sheet and profit and loss account. It matters a lot when it is submitted to the Bank / Financial Institution for obtaining / seeking credit facilities.

Why entrepreneurs should look into their balance sheet?

It is customary for a SME business owner to give the responsibility to Auditor / CA to finalize the balance sheet and to file the IT return. Very few owners discuss deeply the implications of various components of the balance sheet. All throughout the year, the business owners are running from pillar to post to develop the business and focus more on production and marketing. Few owners do not give due weight age for the day to day financial management. Owing to globalization, international economy is impacting small businesses. The Business Owner needs have a clear focus to understand the basics of financial data, however small the enterprises, be.

1. Estimates for the short term:

There are number of commitments in the short term like monthly EMI, and the owners can analyze the cash inflow / outflow to ensure the smooth liquidity of the company’s day to day needs.

2. Projection for the long term:

The present level of operations needs to be understood from the long term financial forecast. A Company can forecast the performance for the next few years based on the present numbers.. The owner can understand the top line and bottom-line clearly.

3. Proper presentation to the bank (to seek credit facility):

A neat paper is always welcome by the financial institution. The bankers start the renewal exercise based on the audited financial of the last year, estimates for the current year and projection for next year (FY). Therefore, a business owner could request suitable enhancement along with the submission of audited financials

4. Investors:

Suppose ‘X’ is a startup and wants to scale up. X looks for suitable investors. The investor once convinced with your product will look into the financial data and arrive at the valuation. Therefore the books of accounts play an important role, in determining the final consideration.

5. Inventory management:

Small Business Owners face the problem of not getting market credit but forced to sell on credit. The inventory management is a key success formula for the SME owners to keep the factory running as well oil machinery.

6. Valuation:

The important ingredients for the investors, the merchant banker, the PE players are to seriously look into the valuation both virtual and tangible assets. The Financials play a key role in determining the valuation, pricing the share, and structuring the premium.

7. Statutory obligation:

No government can wait for the dues any longer. The funds collected for the dues payable for IT / GST and ESIC / PF are to be remitted on or before due dates. The Business Owners need to allocate the funds on such due dates in order to meet the obligation and hence beyond doing business the basic laws applicable for such expenses are to be understood.

8. Credit rating:

The balance sheet / financial data could be evaluated by an external agency like CRISIL, CARE. The business owner has to pay attention to the various components of balance sheet like capital, gearing, profitability. A higher credit rating would be viewed favorably by the lenders who will extend credit at a finer rate.

9. Product mix (Division wise performance):

Small Business Owners / MSME need to focus on product which are really making profit and will be focusing on non core products. Once the numbers / data in the form of division wise production are made available a modification in the style of operation could be made to achieve optimum results. For e.g., one garment manufacturer has been producing and supplying to a famous brand and found that he has been holding the stock for nearly 110 days from raw material to sale realization, since the buyer was not lifting the stock. This situation leads to a lower turnover since the stocks are not fast moving although the buyer is highly reputed. The manufacturer realized and switched over to new avenues particularly to export and reduced the dependency on the branded buyer.

10. Understanding and analysis key financial ratios:

Ratios show the strength of the company in terms of comparison with peers / industry / rating and therefore a balance sheet / financial data plays a paramount role in the development of a business.