Good Expense Management is Key to Business Success. Especially for SMEs.

image credit DRGREP

Over the last few months we got an opportunity to meet and discuss business cases with 100s of SMEs and our observations are the followings:

1. All SMEs are having hard time to raise capital (for both Capex and Opex) from organised financial sector
2. There are plenty of money in the market (much of it is definitely unorganised)
3. When part of the blame of not getting enough finance from organised market (banks & nbfcs) goes to poor bank management, significant part of must go to poor expense management by SME owners as well

We strongly believe that if SMEs manage their expenses more judiciously they can very well manage their businesses with sustainable growth. In reality, however, most SME owners are using much of their business profits for their personal needs (acquiring liabilities) and keeping their businesses cash hungry.

Just last week we met couple of small businesses with almost $2.5M and $1.75M yearly revenue with healthy profit margins. In Indian standard these are pretty good businesses. They wanted us to help them with their WP financing through DRGREP platform. However analysing details about their businesses (especially cash management) we were very disappointed. What we noticed are the followings:

1. They hardly keep track of their day to cash cash flow (just the basic ones — whats going out and whats going in)
2. They don’t even know on exact what was their last month cost to run the businesses
3. No idea on current inventory value they hold in stock. While asking more they just started counting and calculating
4. No day to day expense management. They said they had everything on their heads
5. They do not have personal and business expense account separate

What made us worried about #5 especially was that they did not have clear idea about their personal money vs business money. Since they own the business 100% themselves, they thought its perfectly alright to use all the profits coming from businesses for their personal uses. As a result they lived in fantastic apartments, drove luxury cars, but at the end of the day they didn’t have enough WC to run their business properly. Oh by the way all the liabilities their acquired are not with 100% cash purchase. They took bank loans for that as well. Now whatever little they are profiting from the businesses are going to banks to pay monthly EMIs.

Banks on the other hands don’t mind lending them money for acquiring liabilities (that’s what they always want their customers to do), but do not help them grow the businesses further and create wealth. Banks are designed to suck business profits from various financing activities and unfortunately much of it by encouraging business owners to acquire liabilities. Thats’s what bankers have done decades after decades. Unfortunately very few people and SME owners realise it and majority put themselves into a trap of constant outside debt finance raise. We know many businesses who always complain of paying huge amount of monthly interests to the banks and that they regret of loosing profitability.

When such is the situation, we strongly recommend businesses especially SMEs to avoid Bank dependencies at some point. When the business is profitable, the financial strategy should be such that soon enough it can build a treasury of it’s own to fuel the growth of business so that it can rely on its own and only go to banks for growth capital.

A strong business manager is always the one who always keeps the expenses low while maximising the revenue hence the profit. This is also the ancient wisdom of business, isn’t it? So before even revenue starts coming, a strong planning on how to spend money is very very essential. And there can be n number of ways to do that. Some of the best practices we recommend are the followings:

1. Set up a treasury account and do not every touch it for personal use
2. Keep personal expenses separate from business expenses
3. Keep a clear & Real Time track of the expenses- daily, weekly, monthly, quarterly, yearly
4. Pay yourself a salary even if you own the business 100%
5. Do not pay family members, unless they contribute in your business, from your business treasury (it’s a holy account). If you want to help them, pay them loan from your salary and make sure they return it with some interest. Business is never a charity
6. In personal emergency if you ever have to take the money out of business, take it as a loan with interest, and try to repay it from your monthly salary account. Just treat yourself as a regular employee even though you own 100% of it

There are many more one can follow to make a solid financial strategy to run the business very efficiently. Poor finance management is one of the key reasons businesses shut shops. There are people everywhere who want to not pay you your dues (Borrowers, Buyers). There are another set of people who want you to take money from them and to acquire more liabilities so that they suck up all your business profits (e.g. Banks). On top of it you do not manage your internal expenses judiciously, you are destined to fail your business. And your business certainly does not deserve that.

What we essentially mean are the followings:

1. Create your own banking system within your organisation so that business can survive with cash it generates
2. Treat your business as your baby (or child, kid, whatever) and you do not keep your kid hungry
3. When business makes profit, it’s business’s money, not yours
4. If you take care of your business, it will take care of you very dearly

Not only these disciplines are key to running a successful and sustainably profitable business, but also make investors confident in investing in the business. After-all investors want only two things — 1) invest X and get nX as return, 2) protect the investments. So, one who know how to manage money efficiently is always the one who will be trusted more than others who isn’t a good money manager (meaning expense manager).

Also, one more thing, after analysing and working with 100s of SMEs, we understood that expense management can be a great tool for us (we help SMEs with their WP issues) to evaluate business performances and risk assessments. Hence we are focusing more on coming close to understand the expenses of the businesses we are already working with. And truly we observe a pattern that we can take advantage of. We, therefore, believe a good expense management system not only helps business owners control expenses better, but also tells a story on how a business manager is really running the business.

At DRGREP therefore we not only help SMEs get much needed WP, but also help them with digitise their sales and expense management so that for the 1st time they get valuable business analytics on their smart phones. They now can measure things real time that they never did before. And more they engage with such digital platforms, more data they create for us to analyse and advise them with right strategies.

We are thrilled about the problem we are solving. And we are excited that it’s a hugely solvable problem that needs more than money. From here we just want to build new digital tools and bring more SMEs to the platform and help them with their journey forward.