Small business owners run their business out of their understanding and experience. However, certain avoidable wrong practices or an inadequate understanding can land them in peril.
Here are a few pointers for small businesses to keep in mind and minimise unnecessary spending.
* Cashflow cost: A smooth cashflow is the key to business sustenance. Usually when small industries, fail to honour their commitment, they will end up with a:
a) High borrowing cost for short-term funds;
b) High buying cost due to a delay in payments;
c) Cost of disruption; and
d) Cost of credibility.
Imprudent spending and diverting funds on personal investments into property investments or to support a lifestyle will also ruin the cashflow.
A retailer or wholesaler, will have collections accumulating in their bank account due to credit support from suppliers and they may tend to divert this for other options and when the actual settlement become due, businesses will feel real stress.
* Inventory cost: Efficient inventory management and proper control is essential. Holding inventory creates a holding cost, the risk of obsolescence and lost opportunity cost.
* IT upgrades: Currently, businesses are running in automation mode, facilitating tremendous transparency and efficiency. If the small business doesn’t take care of its visibility, that ignorance can result in losses. Usually small entrepreneurs will worry about the cost of the IT systems, but they will not be aware of the cost of not having the systems.
* Human resources cost: A prudent judgment as to the optimum human capital is an essential. Additional personnel can bring additional volumes whereas excessive or inefficient manpower can ruin the business. The judgement should be based on the value that employees are bringing in, and not merely analysing their count or salary costs. The output and efficiency of the employees should always be looked at to determine the optimum human resources level.
* Credit risk: Have trusted customers especially while operating in a credit market. A default by one customer can shake the entire business. A prudent selection of customers is essential to minimise credit risks. They should understand the implied interest and opportunity cost due to delayed collections.
* Bank charges and fees: In the new banking culture, every type of service is getting charged, from interest costs to commissions. The monthly outflow shall be ascertained properly to strike a fair deal with the bank. Never be carried away by the liberal offers from funding institutions at abnormal lending rates.
Advertisements, business promotions, delivery services and storage should also be investigated. While choosing rental premises, the options will be evaluated between the cost and value to the business mnius its cost.
As every business is vulnerable to changes in trends and innovation, small businesses should have forward thinking. They need to see what their peers are doing and have a feel for trends in the market place. Move along these lines, otherwise businesses will have to bear the cost of displacement.
Negligence, imprudence and lack of financial discipline will prove too dear for businesses. A systematic approach will result in sustainable growth. With proactive thinking and a future-forward understanding, it will be easier to manage a small business.
Mahmood Bangara is chairman of the Dubai Chapter of the Institute of Chartered Accountants of India (ICAI).