Monday, November 13, 2017

Businesspersons Must Monitor SRI, the 3 Critical Factors for Business Survival!

Written by Govindraj Muthyalu CPA, CIA, CISA

All businesspersons want to survive and expand their businesses. All of them are passionate, are energetic, are committed, work hard, sacrifice their family and social life, and undergo lot of difficulties. Even then, why is it that few businesspersons barely manage to survive or even close down their businesses, while others succeed?  What is it that these successful businesspersons do which others don’t?  Is there a tried and tested formula for succeeding in business?

Let me tell you there is no formula that guarantees 100% success in business. Business environment is extremely complex and dynamic, and business success depends not only on internal factors but also on external factors on which businesspersons have little or no control. However, it is observed that, businesspersons who are successful make it a point to monitor SRI, ie Sales, Receivables, and Inventory on a daily basis.

Sales is the life blood of all businesses.  Monitoring sales regularly is very critical for business survival and growth. Best way of monitoring sales is to compare the actual sales achieved versus the budgeted sales.  It is very important to have a sales budget for each region, state, city, and sales person. I am not going into how to prepare sales budget because it is a big topic by itself. However, in short, your sales budget should generally be based on historical data, market potential and market share you want to capture, new products added to the portfolio, and new territories ventured into. It is very important to monitor actual sales achieved versus the budgeted sales, by each region, state, city and sales person on a monthly basis.  In case there is huge variance between the actual sales and the budgeted sales, corrective action should be taken immediately to rectify the situation.

You need to collect the money as soon as possible after you sell. If you are selling on cash, you don’t have to worry about receivables. However, like most of the businesses, if you are selling on credit, it is very important that you collect the money on or before the invoice due date. Very few customers pay their debts within the credit period even if you do not follow-up. Generally customers try to delay their payment, as much as possible, even if they are in a position to pay.  As mentioned in one of my earlier posts, “a sale is a gift until you collect the money”.  So every effort must be made to collect the money as soon as possible. Every business should have a credit department who should be responsible for collecting the debts of the company and keeping the organization liquid.
Many businesses who have huge receivables borrow money to fund their operations, and incur interest costs. In a way, there are financing the operations of their customers by borrowing funds.  So it becomes very critical for business owners to monitor their receivables on a regular basis and ensure that the overdue receivables do not cross a certain level.  Ageing of overdue receivables is very critical and owners must closely monitor receivables which are more than 30 days overdue, and ensure that no receivable is more than 60 days overdue. If any receivable is more than 90 days overdue, they should consider initiating legal action to recover the amount.

Inventory is another area which needs to be monitored very closely.  Businesspersons must realize that their cash is stuck in inventory.  Calculate the minimum and the maximum stock that is required for your business and ensure that your inventory does not exceed the maximum stock at any point. Don’t get tempted to order and stock more items just because the vendor is offering you special discount or payment terms for bulk orders.  If you stock items more than what is required for your normal consumption, you are funding your vendor.  Ageing of inventory is also very important.  Business owners must monitor their inventory regularly to identify those items which have not moved for a reasonable period of time, and disposed them off at a discount before they become obsolete and useless.

There are several other factors which also need to be monitored on a regular basis for survival.  However, any businessperson who monitors SRI (the three factors, Sales, Receivables, and Inventory mentioned above) regularly and takes corrective action immediately, is in a much better position to survive and succeed in this complex and dynamic world.

About the Author
Govindraj is a CPA, CIA, CISA and has more than 25 years of finance, accounting, auditing, and IT experience.  He has worked as a controller and a CFO of many multi-million dollar companies. He is a Gold Winner under the category "Executive of the Year - Computer Software" at International Business Awards 2016 held at Rome, Italy, and a Bronze Winner under the category "Executive of the Year - Cloud Computing / SaaS / Internet" at Golden Bridge Awards 2016 held at San Francisco.  He has lot of experience in designing systems / processes, and implementing ERP packages in various industries.  He is the CEO of Cashpundit Inc. (, a startup that he founded to help businesses to manage their collections and cash flows.