Friday, 26 February 2016

An entrepreneur needs to understand these cost aspects of their SMB business

All over the world and predominantly in India, 1 out of every 10 woman is establishing a business that will monetize her unique skills.  A quick sampling reveals that Baking, Craftswork, Event Management, Tailoring and food startups have all got a Female spearheading it.  When a team of men and women are involved in a startup with VC funding, there usually is a Financial Plan and a P/L associated with it. However, when individual women run the business from their home or from a small retail, usually there is not much financial planning and in a few years of incubation the business is either thrown out by a competition or the business runs into a loss. Generally in India, women aspire to do more and more of their business without looking into how the financials are performing.

Here are some tips for budding entrepreneurs to have in mind as they rise:

1. Business Plan. Never start a business without a basic financials in place. It is an absoulte must to have a Costing done and a forecasted best case and worst case scenario of how the sales could go.

2. Costing. The Costing should always involve Cost per each item sold. For instance, if you are selling Cakes, it is absoulte must to account every cost that goes into the making of "A" cake.  Without this excercise, the pricing may not always be accurate. The costing should cover every angle of cost including labor, marketing and other Operational expenses and overheads.

3. Inventory Management An understanding of the way the price of the inventory changes with seasons. Going back to the food business example again, there could be times when the cost of the inventory such as specific fruits, vegetables and other inventory could peak. It is important to make your business flexible to adapt to these changing market conditions and minimize the use of heavily prized items.

The second aspect is stocking up. You could very well be selling items that have a trickle of demand all through the year. OR NOT.  Businesses are very seasonal. A food business sees a great demand in weekends over weekdays. More in Festival seasons Vs Dull seasons. A Craftswork business sees a great demand during specific months of the year. Stocking up a lot of inventory not only uses your retail space but could very well make it an ordeal to preserve them. Be very smart about your inventory and it could cutback on your costs.

4. An idea of Operational Expenses.  The biggest drain on the running of your business is the operational costs. Put in simple words, this could include the eletricity charges, water charges, Gasolene charges, taxes, repairs, rents etc. While CAPex is well planned, OPex needs to be very tightly managed to run a profitable business. Keep a track of every operational expense per day and get an idea of how it changes with changing business conditions. Understand the OPex elements of your business and track it every day.

Not managing these 4 quadrants well is a sure fire way for a business to fail.

A lot of business templates are available for free in many sites. A simple excel that you custom make is also a good place to begin with. Do get use to the idea of Business Planning and Cost management. If you need any help on the basic aspects of planning for your business, I am glad to help. Please write to me.

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