Do you dream about being your own boss but have nightmares about staying afloat in a competitive market? If you are worried about taking the plunge toward entrepreneurship, perhaps the success rate of small businesses will give you some confidence. Smaller enterprises are hugely popular in India as they generally run at a lower capital cost when compared with bigger businesses. The financial risk is lower and the chance of sustainability is greater. This is especially important in rural areas where Micro, Small and Medium Enterprises (MSMEs) are most popular; but MSMEs also thrive in urban areas.
MSMEs in India
For those thinking about starting small businesses, with hard work and a good product or service, the future shows great promise. As of 2020, India has over 63 million MSMEs in the country, second only to China. In a country of approximately 1.38 billion, these businesses account for a sizable chunk of employment opportunities – about 11.10 crore jobs according to the National Sample Survey 73rd round (2015-16). Small businesses can be seen through all industries (finance, telecom, education, food, real estate, media and more) and often promise entrepreneurs and investors success and profits in shorter time periods than large enterprises.
Getting started
One of the most important (but least exciting) aspects of running a business successfully is bookkeeping. That is, tracking financial transactions. Let’s face it—no one gets into business because they just love dealing with finances! Still, there’s no getting away from the fact that accounting is a huge part of running a small business. And while dropping the ball in this area can be disastrous, the idea of even looking at the financials in the first place can seem just as daunting.
Since a lot of this comes from fear of the unknown, it can really help to get oriented. Here’s an introduction to the key elements of small business financials you need to know about.
The jargon
If you’re new to business finance, some of the words will probably seem confusing. Here are the most important terms you need to know:
Gross revenue
This is the total amount of money you’ve received from your customers, before accounting for your…
… overheads
An overhead is any expense involved in running your business—e.g. salaries, rent, taxes—is an overhead. When you deduct your overheads from your gross revenue, you get your…
… net profit
If this number is positive, you’re making money. If it’s negative, you’re losing money. If it’s zero, then your business has reached its…
… break-even point
While it’s still paying set-up costs and working to increase sales, it’s normal for businesses to operate at a loss at first. So, the break-even point is a big milestone for any business and it’s important to know what it is—in other words, what your overheads are and therefore what your gross revenue needs to be for your net profit to be a positive number. Also important, though, is…
… cash flow
This is about having enough cash on hand to pay your bills. Even a profitable business can have cash flow problems if its expenses are badly timed relative to sales. So, it’s important to run your business in a way that ensures you’ve always got enough cash on hand.
The paperwork
There’s lots of it in any business, but these documents are some of the most important:
Balance sheet
This is a complete overview of your business’s financial status. It includes your business’s assets (what it owns), liabilities (its debts) and equity (its investments). Your balance sheet is ‘balanced’ when the business’s assets are equal to its liabilities plus equity.
Income statement
This is a summary of your revenue and overheads for the year, which allows you to calculate your net profit. Keeping this up-to-date is vital for understanding your break-even point and ongoing profitability.
Cash flow statement
This document tracks your business’s inflow (via revenue) and outflow (via overheads) of cash. If your inflow stays ahead of your outflow, your business is ‘cash flow positive’—which is good!
Revenue forecast
A prediction for how much your company will bring in over the next year, based on things like past experience, number of clients and plans for creating new business. Having a reasonably accurate revenue forecast will help you stay on budget.
Getting paid
Since invoicing is how you ask clients for money, getting it right is pretty important for maintaining a healthy cash flow. That means issuing invoices promptly, having firm but fair payment terms (30 days is common) and staying on top of late payments. You might also try tactics to encourage quick payments, such as offering a discount for customers who pay within, say, two weeks.
Benefit from software
Gone are the days when drowning in the paperwork was a standard part of running a business. Nowadays, accounting software can make things much easier, and the amount of time this can free up shouldn’t be underestimated. Quickbooks, Tally and Oracle Netsuite are all great options.
Tax benefits
As a business owner, taxes can bear a huge load on your finances. Startups and small businesses, however, enjoy various taxation benefits in India. For example, under Section 80 IAC of the Income Tax Act, eligible startups and small businesses can avail of the Tax Holiday Scheme which allows startups to be exempt from paying any of their profit as tax for three years running. They can choose this consecutive 3 years out of a 7 year period. Therefore, you could pick what you feel will be your most profitable years for this tax exemption. Similarly, there are plenty of other schemes which, as a founder, you should familiarize yourself with to enjoy tax benefits.
Call in an accountant
It’s always a good idea to have a professional accountant on hand—most small business owners simply don’t have the time to stay on top of everything without risking potentially costly mistakes.
An accountant can regularly check your books for errors, help you with paying taxes and filing returns and even consult on your biggest financial decisions. And, of course, the peace of mind that comes with knowing that an expert is supporting you is priceless.
