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.
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.
Receivables
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
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. (www.cashpundit.com), a startup that he
founded to help businesses to manage their collections and cash flows.
