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Are business-owners Shrewd and Intelligent?

Aug 20, 2017

 

If this was question, then 99.9% of business-owners will say, Yes!

 

Years of experience, whether toiling with administration functioning or facing rough weather while marketing, most of the business-owners are aware of their financial health. Based on them, they decide to give discounts to their customers, buy and stock material at times, and even add new products / services to their existing business. Many of the small & medium enterprises (SMEs) off-load basic accounting, i.e., book-keeping activity, to outside agency or person and concentrate of marketing, business development, and administration of their units. This mechanism helps them to concentrate on their business-core; but at times, lead to miss-out of business opportunities. How? Let’s check on this.

 

In this competitive and complex business environment, pricing for almost all raw material / purchases varies on daily / weekly basis. Be it vegetable, food-grain, cotton, cloth, chemical, metal, minerals, plastic, paper, wood, fuel, etc. In addition to this, transportation, bank finance (terms of loan), foreign currency fluctuation adds to business complexity. They and many more, make pricing of a product or services, challenging job for a business-owner. Until an appropriate selling price is levied to cover all such cost and leave some margin (i.e., profit) for the business, continuity of customer servicing cannot be assumed.

 

Similarly, when a business-owner wish to put more funds into growing the business, knowing current health of the business returns (return of investment / net worth, volume of capital employed into each segment of product category), outlook of the business environment and willing to take risk (i.e., forgo returns / risk capital) for some time are important challenges to be handled. If proper accounting of the current / running business is not known, business-owner increases risk of the odds.

Like any business-owner would want regular business environment updates to weather any challenging environment or take opportunity if available, regular updates on accounting of expenses (and income) is NECESSARY. Gut-feeling / business instant may be part of business owner’s decision-making process, but if it is backed by accounting updates (accounting of all relevant expenses, booking of income, adhering to accounting principles and policies), decision making process will be stronger and reliable.

 

When we are not well and have fever, we (or the doctor) measure it in the thermometer to know the exact temperature, so the relevance of accounting for the businesses. Skipping or delaying accounting only makes business vulnerable to decision-mistakes and may cause

long-term harm to business continuity.

 

So, with regular accounting of expenses and income, will continuity of business be assured? Continuity of business (or for that matter even the current business) is known to be linked to two broader areas – management controllable and management non-controllable. Those like government policies, domestic and international business environment, industry innovation and disruptive idea of new incumbent, weather, customer’s taste and likes, climatic environment, etc. are example of factors which cannot be controlled by a business owner (management non-controllable). Making (in own unit) or purchasing from outside, purchasing material in volume at a discount and stocking, change in manufacturing process / administrative set up, marketing strategy, etc. are factors which can be controlled by a business owner (management controllable).

 

Domain expertise, business readying sense, risk taking appetite and detail accounting updates only makes a business-owner more confident while engaging in current business or while expanding.

 

 

Learning shared by CMA Manish Shukla, a practicing cost accountant

 

 

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