Effective Financial Management for MSMEs

In India, the Micro, Small and Medium Enterprises (MSME) sector is second only to Agricultural Though new on the economic radar, this sector promises a lot Its current vibrancy and vivacity impacts the nation on various fronts like:

GDP

Economic output

Employment

Social development

Sustainable development

Innovation

Decentralization

These units that pump a humongous amount of value into the country’s economy need to be secured and backed-up with strong financial planning. Though the relevance of managing finances is undisputed, while catering to other pressing aspects of business it is easy to lose track of the financial stand-point. Financial planning is incomplete without budgeting and forecasting, together they complete the coin. If budgeting is the imprint on a coin that generates value, then forecasting is like the

sheen adding glimmer.

This blog aims at discussing on how MSMEs can focus on financial budgeting and consulting firms in India.

Importance of Budgeting and Forecasting for MSMEs

In an MSME’s life-cycle finance is a vital ingredient at various stages like:

Start-up stage

Survival stage

Growth stage

Sustenance stage

Budgeting is like designing a goal-sheet for a company with specific agendas.And forecasting is like putting a date on those goals.

Budgeting and forecasting establish the company up on the path of progress a year at a time. It integrates contradictory traits like hope and dreaming big alongside of conservativeness and being-grounded

Best Practices for Budgeting

Financial budget is a statement of expected revenue and expenses in a given financial tenure (usually a year) It’s an opportunity for the company’s leadership to set the pace for an upcoming year They delve into the ground-reality and devise tactical action-plans to get there

Budgeting sets the pace for:

Staffing

Production

Inventory

Borrowing

Revenue management

Three major aspects of budgeting that suffice to identify the best budgets from the rest are: areas of budget allocation, possible methodologies and the strategies to get there

Areas of budget allocation:

Financial

Sales

Marketing Capital

Cash management

Project based

Methods of budgeting: Growth budgeting:

Growth is every company’s dream. With growth in income a brand experiences increment in expenses too. Ex: if the leadership is looking at a 9% income-growth during an upcoming tenure, they must allocate a 9% increased budget for the expenses too.

Value-based budgeting:

Across various aspects of each business, value generated from each one of them can differ In this type of budgeting the leadership can identify the most value-generative aspect of their business and allot an increased budget for it Ex: If some company finds value in R&D it should invest more into it.

Activity-based budgeting:

In this type, historical data and analysis plays a crucial role Once the company can pin-point the activities like marketing, or feedback collection etc that might have worked well for their growth in the past, then, can root-in on it again

Make-over budgeting:

While wardrobe and styling makeovers are common, budgeting make-over is uncommon but ain’t unheard of. In this the leadership assumes new-eyes and views the brand / company in fresh light.This perspective is more helpful in curbing negative-budgeting outcomes of the past.

Strategies of budgeting: Involving stakeholders: to increase the sense of belongingness

Accessing historical data: to ensure company dodges the revival of old ghosts.

Analyzing the past performances: to enhance the further ones with well sketched out dos and don’ts.

Considering industry benchmarks: to identify where the glass ceiling is assumed to be.

Realistic and simplistic approach: to ensure the progress remains swift and constant

Timely reviewing and revising: market dynamism prompts the inclusion of this aspect to meet the yearly goals

Best Practices for Forecasting

Financial forecasting can safely be termed as a pre-requisite for budgeting. It helps draw a clear picture of many aspects expected to impact a business. Forecasting employs historical data and statistical analysis to attain its targets financial forecasting paves the way for an efficient budget allocation and devising a strategic roadmap for the company. Forecast works well for both short / long-term.

Effective financial forecasting materializes by engaging in three significant factors:

Quantitative factors:

Trust historic data

Identify and analyze key trends

Prepare multiple forecast version

Trust numbers, not assumptions

Qualitative factors:

Begin with the end in mind

Be conservative yet visionary

Reflect upon unforeseen scenarios handled in the past

Asuccessful forecast would deviate within or around 4% only

Reflective factors:

Incorporate feedback from stakeholders

Regularly review and adjust the forecast

Dynamism along the journey will bag more fruits

Utilize top-down and bottom-up both the approaches for better outcomes

Tools and Technologies for Budgeting and forecasting or business consultant company

This task surely am not a cake-walk, instead it’s a roller-coaster ride Various tools and techniques can be employed to ease the task While record keeping is a common tool in every aspect, other aspects can be divided into two major categories like:

IT aspect: Excel spreadsheet

It’s a handy and easy option when the needs are less than intense.

Advanced Software

Some examples of this are; Finley, Peak flow,Ana plan, Vena, Casual, Playful, Board, One stream etc. Online services

Many software and application companies provide digital portals and all in one processing platforms too Apps

Some known apps that do this well are, Empower,YNAB, Mint, Pocket Guard, Good budget, Stash, Honeydew, Digit etc

Human aspect:

Reliable vendors

Improved deadline commitments

Quality check

Regular learning & trainings

Like every coin, budgeting and forecasting also comes with its own drawbacks Although these activities sound like a one-time task to be done every year; it is anything but that! Dynamism is an integral ingredient here When a company / brand falls short on dynamism and improvisation it’s like as good as planned to fail

The red flags of financial budgeting and forecasting can be:

Unrealistic targets

Micromanaging the finances

Overlooking of other business-aspects

Falling into the rigidity trap

Inviting internal conflict and blame-game

Risk of losing out on the long-term agendas

Here the green flags are worth a look too:

Goal clarity

Measurable targets

Accurate revenue handling

Enhanced accountability

Promotes coordination

Improvised inter-department communication

High on confidence and motivation

Satisfaction of being in control

In spite of their contribution, MSMEs in India face several challenges like high cost of credit, rapidly changing technologies, competitive market etc to name a few In the wake of the insecurities, building finer practices around the financial fore-front remains vital Market uncertainty is a reality that cannot be escaped but can be survived.Appropriate financial forecasting and budgeting does exactly that. When MSMEs embrace data and analytics in combination of right tools with proper budgeting and forecasting they leverage a strategic advantage of having prepared. Rewards of saving on crucial time, reducing errors, clarity, disciplined management etc. are ensured. More the accuracy they target, exponential are the benefits.To understand how Stratefix can empower your business in its journey of financial budgeting and forecasting