Usually when a business collapses, people assume that the marketing or product is poor, but did you know that most of businesses that closed are due to poor financial management? Yes, lack of financial literacy among entrepreneurs takes a toll on their business. Even if the product is good, the marketing is good and the team is also strong, but if there is no proper management of money in the business, the small or medium enterprises either close down or cannot achieve the expected growth, just like a small ant can defeat a giant elephant, lack of literacy can destroy even a thriving business.
Literacy has increased in the country, but financial literacy has not increased as expected. According to a survey by S & P Global, the financial literacy rate in India is only 24 %. That means 76 % people have no knowledge of financial transactions. Global survey also indicates that most businesses close down not because of production or marketing, but because finances are not managed properly.’
1. Financial Literacy :-
No business can run without money, but the biggest flaw is that we are not taught money management in India. Children usually learn money management from the experiences of parents or people around them, but there are many aspects to consider. Even a small mistake can cause a big loss. Indians fall behind in this matter due to lack of training. We fall back on systematic liquidity planning and inflation adjusted demand for money. Apart from this, we do not pay attention to compliance related to proper tax. Realistically, we must have a thorough knowledge of the financial factors that affect our business. Various initiatives have already been taken by the Government and the Reserve Bank of India to increase financial literacy. The government has also set up an organization called the National Centre for Financial Education, whose mission is to increase financial literacy. If financial literacy increases among all, from businessmen to housewives, the country can be taken forward in the direction of faster development.
a. Choose the Business Form Wisely: Small and medium enterprises are technically very sound in the product or service they are providing, but they have to depend on experts for finance. From the very beginning, industries should take informed decisions. For example, when a person is thinking of starting a business, he has no idea in which form to register the business. If the wrong form is selected then many difficulties have to be faced later. There are different forms of business like Proprietorship, Partnership Firm, HUF, LLP, Trust, Company etc.
In many cases, it is seen that the business is running in a partnership, but its form is that of a proprietorship. Generally, if there is only one owner, the business should be registered in the proprietorship form. If the risk in business is high and you register the business in partnership or proprietorship, you have unlimited liability. In such circumstances, if there is a loss in the business, your personal properties are also at risk. Hence, a limited liability partnership is a good form for a business that involves risk. A private limited company is a good option if you want to separate the owner and the director who runs the business. Public limited form is better for those who have large scale business expansion.
Business form should be chosen according to the business activity. Many small and medium enterprises are afraid to scale up even if the business is doing well, but if the business is going well, small and medium enterprises should not hesitate to adopt the private or public limited company form. Each business format has different tax effects and different laws apply to it. Hence, whether you go for Private or Public Limited, the business can grow faster, you can do more comprehensive tax planning and you will also get many benefits from the corporation. Many businessmen choose a business form in haste. If a partner is found in the business, a partnership is formed. Apart from this, the partnership deed also does not make necessary clarifications. Hence, if any problem arises in the business, many disputes occur. Finally, due to internal disputes, the business has to be closed. Similarly, if you want to expand your business, you should take a decision by taking the advice of an expert and understanding its pros and cons, without being emotionally strained. If there is a lack of clarity between the partners, there may be legal consequences in the future. Apart from this, the exit route should also be known when starting the business. A provision of arbitration should also be added to it. Thus, if the idea of doing business comes up, decisions should be taken with the help of a finance expert from the very beginning.
b. Financial terms to be aware of: Not having a background in finance doesn’t mean that you don’t focus on accounting or finance at all. If you blindly trust an accountant and there is a mistake in filing a GST or Income Tax return, it can cost you dearly. There are some common financial terms you should be aware of, like asset, fixed asset, current asset, liability, current liability, long term liability, cash flow, depreciation, profit before tax, profit after tax, working capital etc. Apart from this, you should also have an idea about the primary law. In addition, an entrepreneur should know how to read balance sheet and profit-loss. Every statistic in business affects the financial health of the business. Hence it should be regularly monitored, analysed and based on that a decision should be made as to in which direction to take the business. Every businessman must have a clear idea of the source of his income. Besides, many people have a good business, but they constantly have to face the problem of liquidity. For that, the entrepreneur should take care whether the cash comes from daily business, investment, equity-loan or from which source. By doing this, the business does not face a cash crisis.
c. Keep an eye on interest rates: You may have a good business income, but you will not see any income if you are paying a lot of interest. One should be especially careful with compound interest. “Albert Einstein called compound interest an eighth wonder. If you are earning compound interest on your investment, it works in your favour, but if you are paying compound interest, it works against you.” Businesses should keep an eye on Net profit, Gross profit ratio, product consumption increases or decreases whether debtors make payment on time or whether loan is repaid timely or not. All these should be paid attention to.
Our country’s economy has now become debt driven. This means you get funds easily, but if the interest rate is not taken care of, it can cost the business. Many businessmen take personal loans at 24 or 28 %. In such an unanticipated situation like Corona, the business stops and the mentality of drinking ghee by going into debt can prove fatal.
d. Avoid getting into debt for fun: When you think of borrowing money, you should definitely ask yourself the question, am I borrowing this money for necessity or for fun? It is not advisable to borrow funds for luxuries like cars, property etc. at high interest rates. On the other hand, if you take a loan for business, make sure that the income is more than the amount of interest you have to pay. Apart from this, siphoning of funds should also be avoided. This means the money should be spent for the same purpose for which the loan was taken. A good business can collapse due to fund siphoning. ‘Your earnings should be effective, savings should be made for growth and investments should be made very wisely. One should stay away from slippery schemes like Ek ka tin.’ Businessmen are also advised to take insurance.
e. Prepare a business budget: When you are doing business, you must know what you are planning for the next month, next quarter, and the next four-five years. You should calculate all your income, expenses, liabilities etc. for budget period. If the budget is not made, sometimes there is a situation where there is no fund even to pay the salaries. Apart from this, by making a budget, if the liquidity is high in some months and low in others, it also gives an idea of how to balance it. The fundamental difference between success and failure in business is money management. If the business does not manage the money, then the money starts managing the business. Money leakage can sink a business. Hence, small and medium enterprises should avoid over-spending, money siphoning and financial fraud.
The ultimate goal of every industry is to increase financial viability. Before undertaking a new venture, the issue of Budget should be taken into consideration. Cash flow management is such a simple subject, yet it is prone to mistakes. Government of India, Government of Gujarat conducts literacy campaign on Financial Literacy. GCCI is also trying to spread awareness through such talks and series.
2.Digital Literacy:
i. Be careful with digital transactions: In the Digital economy, both small and large businesses are adopting the convenience of UPI- an online payment facility. However, the road to digital transactions is slippery. If a mistake is made knowingly or unknowingly, the financial loss has to be borne.
ii. Do not share passwords with everyone: Businesses should keep their passwords very secure to avoid financial fraud. Do not share it openly with staff or team. Also change the password periodically. In addition, download financial applications only from trusted sources.
iii. Don’t connect to Wi-Fi anywhere: A virus can enter your system from an unknown wi-fi network. Apart from this, many traders are not aware of installing antivirus in the system. Protecting data is very important in today’s era. Hence, pay special attention to secured connectivity.
iv. Log-out: Do not close the screen without logging out if you have accessed the Income Tax or Net Banking site. If the log-in page is left open by mistake, someone can misuse it. Specially use the SMS alert system if you are using net banking.
v. Do not share bank details: Hackers try to commit financial fraud in various ways. So if you are sent a link from an unknown number, do not click on that link by mistake. Do not share your OTP or bank details with anyone. Be wary even if someone asks you to share laptop or phone screen.
vi. Don’t fall into the clutches of instant loans: Many scams run in the name of giving instant loans to lure people. If you come across such an offer, do not fall for it and be very careful while making digital payments or transactions.
3. Tax Literacy:-
i. Avoid cash transactions: As of today, many people in India do not believe in the digital economy. They transact with cash. If there is a dispute in cash transactions, it cannot be proved and huge losses are incurred. Also avoid withdrawing or depositing cash. Doing so increases the chances of getting a notice.
ii. Keep dealings with the government transparent: It is important for businessmen to be transparent in their dealings with the government. It should also be ensured that Pan-Aadhar is linked. Otherwise they have to pay heavy interest or penalty. In this way, if the transacting Party’s GST number is not verified, its credit is lost that results into a huge financial loss.
iii. Don’t rely too much on consultants: It is not advisable to rely too much on consultants for IT or GST returns. Make sure that the return is filed on time. Keep the acknowledgment receipt. If the return is filed, but the acknowledgment receipt is not received on time, the return is not considered filed. In such circumstances a penalty may have to be paid.
iv. Fill the return even if the business is in loss: Many traders do not file returns when losses are incurred, but the advantage of filing returns is that losses are set off against future profits. In the same way, if there is a good income, payment of advance tax also brings special benefits, interest burden is reduced, and penalty can be avoided.
v. Check the details filed in the return: Sometimes the details which are not ours are also filed in the return. We have to pay a penalty later for this mistake. Take special care whether the details of your assets, credit, loans, etc. have been correctly indicated by the consultant in the return. Also check 26AS, AIS and TIS.
vi. Do not ignore Income tax message or mail: Many people ignore SMS or mail from Income Tax. This mail may contain a notice or intimation to you. If the reply is not given, then the government makes an ex-parte order. In such cases, a huge tax or penalty may have to be paid. If a mail or message comes from the government, immediately contact the consultant and reply to it.
M.S.M.Es are the backbone of Indian economy. They have limited availability of expert services. If they keep above factors in mind while dealing, they can avoid many mistakes/hurdles/obstacles in their growth and grab opportunities easily.
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