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The importance of sound finances

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By Bjorn Biel M. BeltranSpecial Features Writer

The question of whether a start-up will succeed and grow or struggle to survive is one that can keep many entrepreneurs and aspiring businessmen pondering anxiously late at night. Often, the doubts and uncertainties can overshadow an entrepreneur’s belief in a great business idea, and in many cases, this can contribute to a start-up’s early demise. Overcoming this anxiety is just one of the many obstacles on the businessman’s path to success.

Fortunately, there is a simple answer to this doubt, and it all lies in how a start-up manages its finances.

In an e-mail to BusinessWorld, MPM Consulting Services, Inc., a company which offers accounting, bookkeeping, tax, and other business services to entrepreneurs, cited a study showing that only a fourth of new businesses survive after three years from inception, while the rest struggle and close down.

“Starting a business is easy but continuously running it can be tough. With our experience with Philippine start-ups, a number of them succeed and continuously grow, but many struggle to survive and eventually close down. There are a number of factors that contribute to the struggle but I think most were related to finances and government compliances,” Maria Lourdes M. Yanuaria, founder and CFO/COO of MPM Consulting Services, said.

“What I noticed, especially in the past, is that Filipino business owners don’t give much time and importance to financial reporting. They just let the accountant handle it all, normally for government compliance purposes, and not for financial analysis.”

This is a huge missed opportunity, she noted, as regular and accurate financial reporting can do wonders for gauging the financial performance and health of an enterprise, giving business leaders a snapshot of the company’s near future. A sound financial reporting system can allow entrepreneurs to make business decisions rationally and objectively. A lack of it will force them to rely on guesswork and instinct.

“The importance of financially analysis is for the start-up to know their current status of the business, so that they know which area to adjust or improve. Without such objective analysis, the start-up may run the business out of emotion and luck,” she said.

How to begin, then? Ms. Yanuaria said that to begin an enterprise in the best possible way and give it the best chances of surviving financially, they must consider the analysis and monitoring of their business’ financial data and government compliances. And they must do such analysis and monitoring regularly, ideally, every month. A basic foundation for all start-ups no matter the size should be in bookkeeping.

“Have a proper accounting process in place in your business, no matter how small or big it is,” she said.

“That way, you can have monthly financial reports that can help you analyze what has happened in your business, and what you can do to change it for the better. Without such proper basic foundations, it may be difficult to manage the business.”

Additional adjustments to operations to ensure the best possible outcome would be the inclusion time and money management, and the strict separation of business expenses and personal ones.

“I think one will be the belief that running a business is easier than being employed. Running a business, especially at the starting stage, needs more working time than being employed. It will require time more than the eight hours a day, Monday to Friday,” Ms. Yanuaria said.

“Since start-ups are often personal or family-owned, the personal and business transactions are often mixed up. Often, the business struggles to operate and expand because it lack the funds it needs since it was already used up for personal expenses.”

Ms. Yanuaria suggests that instead of mixing up business and personal funds, entrepreneurs should give themselves a set allowance if the business is performing well. A planned business budget which takes into account the needs of its people, the expenses of its operation, as well as government compliances, can go a long way.

“Try to stick to that allowance no matter how big the business gets. If the business is starting and not yet profiting, make sure you have enough cash to sustain your daily needs. Stay employed or save up an amount of cash enough to sustain you for at least one year,” she said.

MPM is an outsourcing company that provides outsourced internal accounting and payroll services to businesses. Aside from its internal business services, the company also offers an online and mobile portal where clients can view their financial reports and government forms anytime.