Introduction:
Many emerging businesses lack critical elements beyond the traditional pillars of a new business (i.e. a distinct idea, an excellent team, and a large market opportunity) that sometimes determine their ultimate success. Sometimes the difference between failure and survival is a founder’s ability to analyze the financial status of their business.
Financial literacy for founders encompasses the ability to comprehend and interpret financial information about a business to make suitable decisions concerning the business’s resources.
Founders of newly established and emerging businesses in Bangalore and throughout India should acquire these skills as quickly as possible to facilitate effective engagement with the finance and account departments, as well as bankers, investors and business advisors.
Pavan Kumar & Co. (an association of Chartered Accountants, estd. 1985) offers a range of professional Chartered Accountant services to the business and industry, including, but not limited to, taxation and GST services and consultancy, assurance and advisory services, and payroll services.
What is Financial Literacy for Founders?
Financial literacy for founders goes beyond financial statements and cash flow projections. For instance, it includes the ability to interpret and analyze the financial rationale behind the business’s decision to enter into a joint venture, or acquire or dispose of a business.
Founders must have financial literacy in various areas, such as:
- Revenue
- Gross margin
- Operating expenses
- Profit
- Cash flow
- Financial position, including receivables and payables
- Working capital
- Taxes
- Statutory obligations
Financial planning and projections
Understanding these concepts helps founders move their financial understanding beyond the basic question of “are we making sales?” to more valuable questions, like “are our sales worthwhile?” or “can we meet our financial obligations with our cash resources?”
Profit vs. Cash Flow
A profit and an cash flow can be completely decoupled.
A business can record a sale or other profits, but still be cash flow negatively impacted.
An example is when a business sells product on credit. From an accounting standpoint, the sale is recorded. However, the business is still cash flow negatively impacted until the customer pays.
Cash flow negatively impacted situations are unavoidable, but good cash flow management can help ease the pain.
What is Important for Founders to Know?
Founders must know their cash flow. They should always be aware of their cash resources, cash outflows and cash inflows.
They must also know accounts receivable and accounts payable.
Finally, founders must be aware of their cash runway.
The metrics and the frequency of reviews chosen by a business are based on its business model and cash flow.
Analysis of Business Margins
Business revenues do not always reflect the health of the business.
Margins show the business owner the revenues less costs and other consumables.
Gross Margin
The gross margin is the difference between the revenues and the costs of the goods and services sold by the business.
A falling gross margin may point to changes in business prices, the costs of the business suppliers, the nature of the business services and goods sold by the business, and other factors.
Operating Margin
The operating margin is the difference between the revenues and the costs of the business and the expenses incurred by the business to provide the services and goods sold by the business.
Why Margins Matter
Margins assist the business owner to make decisions including the prices charged for the goods and services of the business, the profitability of the goods and services sold by the business, the profitability of the customers of the business, the business costs, the business expenses, the business services and goods sold by the business, the business marketing, and the business plans of expansion.
A business may need to review its prices and costs charged to customers if the business records rising revenues and falling margins.
Founders must be able to review the accounts receivable process and invoices.
Step 1: Review Payables
Be able to review the bills the business has to pay and when.
Being able to review payments owed gives the founder the ability to more effectively manage the cash flows of the business.
Step 2: Review Tax and Compliance
Depending the business activity and structure, there may be income tax, GST, TDS and other taxations and compliances.
There may be also payroll taxes and other compliances.
The timing of the taxes and requirements may differ based on the business activity and transactions.
step 3: Prepare Financial Projections
Knowing when money is to come in and when it is expected to go out gives the founder the ability to plan and project cash requirements of the business.
Forecasts and projections may need to be updated based on the changing conditions of the business.
Financial management is especially important for the initial stages and growth of a business.
This includes the start-up and first stages of a business, as well as a family run business and a new profession.
Financial Management is important for service businesses, e-commerce and other retail businesses.
It is important for technology and other businesses.
A financial management mentor may be able to simplify and teach financial management tools and concepts for a business.
This may include GST and other taxes and financial and compliance reports.
Understanding key financial documents may also be helpful.
Exemplifying records may consist of:
- Profit and Loss Statements
- Balance Sheets
- Cash Flow Statements
- Bank Statements
- Accounts Receivable
- Accounts Payable
- GST
- TDS
- Taxes
- Payroll Records
- Budgets
- Forecasts
- Expenses
By maintaining adequate financial records, a business can facilitate financial review, tax compliance and audit defense, and aid in business strategy planning.
What are the Financial Blunders committed by Founders?
Funds inflow is merely one side of the business Finances and Founders, often mistakenly, ignore the other side, outflow.
If a Founder is deeply preoccupied with selling and taking in money, is he or she managing to ensure that money out goes out as and when due?
The responsibility becomes tricky when money is lent or borrowed and a Founder transacts personally. Record-keeping becomes extremely dicey and clarity in finances, more so, in business finances, becomes elusive.
Delays in book-keeping
Worse, Founders tend to assume that old financial problems no longer exist. Taxes, and GST in particular, are problems Founders are prone to ignore.
Prior to taking major business decisions, Founders must analyze the finances.
Forecasts give a fair idea of future numbers, and although market conditions must be taken into account, assumptions and estimations in forecasts must not be taken as absolute figures.
Startup Founders engage the services of CAs not only for Tax and GST compliance but also for a myriad other services.
The areas of financial management and control supported by CAs for Startups include:
- Book keeping
- Accounting
- GST
- Income Tax
- TDS
- Payroll
- Audit
- Financial advisory services
- Business registrations
- Litigation
- NRI Tax services
CAs for Startups assist and empower Founders in comprehending Financial Statements.
Professional advice depends on the regulatory framework and the type of business activity being conducted, as well as the financial condition and structure of the business.
Pavan Kumar & Co. has over 35 years of experience in a range of financial management and compliance services, and has a deep understanding of the challenges facing small and medium enterprises, startups, HNIs, and professional individuals and service recipients.
The firm is equipped to offer a full range of financial management and compliance services to help clients meet their financial obligations and responsibilities.
Founders in Bangalore, including Seshadripuram and surrounding areas, need professional and structured finance management and compliance services.
Pavan Kumar & Co. is highly committed to client satisfaction, and the partners of the firm believe that they have a responsibility to aid their clients in effectively understanding their financial obligations and responsibilities in the most transparent manner.
FAQs
- Importance of Financial Literacy for Founders
Financial literacy enables founders to analyze cash flow and other aspects of the business financially to make informed decisions for the business.
- Cash Flow Management
It is the ability to effectively manage the inflow and outflow of cash in the business while ensuring sufficient cash to meet the expenses and keeping an eye on the collections and payments made by the business.
- Is it essential to have a Chartered Accountant (CA) for a start-up?
Although start-ups do not require full time Chartered Accountants (CA), they can provide valuable services in accounting, bookkeeping, taxation, Goods and Services Tax (GST) and other areas.
- What financial reports should founders know?
Founders must know their income statements, balance sheets, cash flow statements, accounts receivable and accounts payable, and other reports relating to taxes and other legal requirements.
- Can a CA explain financial reports to founders?
Yes, a CA can explain financial reports to founders based on the financial situation of the business.
Financial literacy plays a key role in business decision making. Understanding cash flows, expenses, taxes, and reports helps founders in having valuable discussions with financial team and professionals.
It is important for startups and growing businesses to have a professional finance team.
Pavan Kumar & Co is able to fulfill the accounting and financial requirements of an entrepreneur by providing a range of services including GST, tax, payroll, audit and compliance services, as well as financial advisory services.
Financial management is a key element of the effective control and direction of a business. This is especially the case during the start-up and early years of a business, or when a business undergoes a period of expansion and/or modernization.
This article does not provide legal, financial or tax advice. Such advice should be obtained from a qualified chartered accountant.
Startup Financial Mentorship is available with CA Pavan Kumar and his team.
Services offered by Pavan Kumar & Co include tax and audit services, accounting services, GST services, payroll services and financial advisory services.
Pavan Kumar & Co.
Sannidhi, 26, RK Street, Jai Bheema Nagar, Seshadripuram, Bengaluru, Karnataka – 560020
Call: +91 9844081653
Email: capavankumars@gmail.com
Our team at Pavan Kumar & Co. is passionate about providing a host of tax-related services including GST, payroll, accounting, auditing and other consulting services.
Our blog is for educational purposes only. For tax-related advice, contact a licensed chartered accountant.