What is Working Capital? Technically speaking, Working Capital = Your Current Assets – Your Current Liabilities. This means that working capital is the liquid money or asset you have that can be used for immediate payments, whether planned or unexpected.

What is Working Capital Maximization? Business veterans will often warn you to manage your working capital well, as lack of supervision and control can cause shortage of funds to:

• Continue business operations in the regular manner
• Meet short-term debt
• Meet operational expenses

5 Ways To Maximize Your Working Capital: Here are 5 easy ways to maximize your working capital:

• Get Paid On Time: Your business needs cash and unless you get your payments on time, availability of funds will always be a sore point. Make sure that you maintain an accurate debtors ledger so that you are on top of debtors collection dates, and can send timely reminders to your clients on invoice payments. Here’s a very effective guide on How To Get Paid On Time that teaches you how best to manage your invoices.

• Enforce A Payment Policy: This is easier said than done, especially if your business is new and still small. However, this shouldn’t stop you from negotiating on a payment date for your creditors and communicating the same to them. A fixed payment date helps in many ways – first, the payment schedule helps you to arrange for funds on time and not before (thereby wasting working capital) and not after (to save you from defaulting). Further, your business does not have to take calls from your creditors at frequent intervals, thereby saving your precious time and resources.

• Refer To Your Cash Flow Statement Regularly: If you are using an accounting software like QuickBooks, generating a Cash-Flow Statement will be instant. In case you keep your accounts manually or in an excel sheet, make sure that you draw up the Cash-Flow Statement once every week or maximum 10 days (depending on your scale of operations) in order to understand clearly the sources from where cash is expected to come for a certain period and your payment liabilities.

• Rein In Your Inventory: Prudent inventory management is an important factor in making the most of your working capital. Identify slow-moving items of stock and buy the minimum possible to meet customer demand. For the fast-moving items, calculate the Economic Order Quantity (EOQ) such that funds don’t stay tied up in stock for undue periods of time.

• Review Your Cash Policies Periodically: You know it better than anybody else that business environment and conditions change. Make sure that you build in both external and internal changes in your reporting tools. Further, periodically review the changes and the resulting impacts and draw new policies basis the change. This will help you get more control in your working capital management, thereby maximizing it as and when necessary.

 
The decision to outsource can be a function of lower operational and labour costs, a lack of expertise within a business (for specialty functions), or to keep employees within the business focused on the core business functions. Lower operational and labour costs are usually the main reasons why companies are outsourcing, thereby making them more efficient and helping them reap bigger revenues.
 
Of late, many small businesses are outsourcing finance functions because many of them are not confident of taking up high-level financial management tasks. Several progressive businesses are gaining significant advantages from this, as it works out far cheaper and beneficial than having a highly paid CFO.
 
Many companies are also outsourcing HR functions like hiring, training, managing the performance management system and payroll processing to free-up their internal HR team to enable them to focus on more strategic activities for the organisation.
 
The need for outsourcing generally arises when there is a lack of expertise internally to manage certain functions that impact the company’s desired growth. Therefore, by delegating responsibilities to external sources, companies can focus on offering greater value to their clients or customers.
 
However, the decision to outsource has to be a measured one, and businesses should opt for outsourcing only after thoroughly thinking through the pros and cons. Special attention must be paid to the profile of the service provider. Today, technology makes it a lot easier to find the most reliable and capable provider. Professional networks and platforms like Twitter and LinkedIn can be leveraged to zero in upon the most suitable and trustworthy provider.
Investments have to be right, so it is best if companies allocate a budget for outsourcing, which could be the surplus not being used in any running projects. Allocating budgets will also ensure that spends on outsourcing do not go overboard.
 
Outsourcing should never be a hasty decision; business owners should invest time to carefully weigh the cost and efficiency advantages, identify the right vendor, and the kind of value add coming from them. Companies need to ensure that they are outsourcing only to improve upon their efficiencies and ensure that the engagement yields optimum results for all stakeholders involved.

Have a dream? Bootstrap. And that’s what you did. You have bootstrapped (Read about Basics of Bootstrapping) your way into the world of entrepreneurship, building it brick by brick, client by client, employee by employee. And now, when you have your feet firmly in your operations and business model, you are ready to take the next leap – that of growth and expansion.

How then should you go about raising the additional capital? We discuss it here -

• Bank Loan: Most entrepreneurs, even to this day, first think of loans from banks when they are in an expansion mode. Such loans are appealing since neither your ownership is diluted nor is your freedom curtailed. However, taking loans from banks do have their own pros and cons. Assess them before you go for it. Here’s an insightful article on subject – Pros and Cons of Bank Loans

• Venture Capital: The red hot sector in modern India, venture capitalists, offer a lot more in expertise and experience over and above the money they invest in you. Should you be willing to ‘expose’ your business to investors, getting venture capital funds should be your answer. Read about the availability here – VC Firms in India

• Trade Creditors: You may also want to tap your creditors for the services, supplies, raw materials or even finished products you buy from them. Negotiate longer credit periods to cut down on your entrepreneurial finance. This will give you the liquidity that you need so badly for your growth plans.

No matter the source of funding that you may finally choose for your additional capital requirements, you need to keep a few basics right so that investors/lenders ‘park’ their money with you.

• Be ready with a focused funding proposal. Include details of your business plan, important numbers and forecasts of revenue growth and financial viability.

• Have you had a clean credit history so far? It is perhaps the most important factor that will be considered by your prospective lenders when they decide whether to invest you or not.

• Do a market study to understand the prevailing terms and conditions in your line of business. You wouldn’t want to get a raw deal, would you?

• Along with the point above, make sure you are well aware of the industry jargons. Ignorance on the terminology can cost you dear when you are negotiating the finer lines of your loan.

• Finally, sign nothing before you have taken a qualified opinion from someone trusted and knowing. A legal scanning of the document will also protect you from lop-sided agreements.

Ratio Analysis helps you understand your financial statements better as they give insider views on the working of your business. We have already discussed 5 Ratios That Show Your Business’s Health and 4 Profitability Ratios Every Business Must Calculate. In the present article, we will tell you about those important performance ratios which you must calculate at regular intervals in order to assess how well your resources are utilised and measure the business’s performance over a given time.

Investopedia defines Performance Ratios as, “These ratios look at how well a company turns its assets into revenue as well as how efficiently a company converts its sales into cash”

Performance ratios help in:

• Gauging how efficiently and effectively a company is using its resources to generate sales
• Determining the growth of the promoter’s investment
• Measuring how individual aspects of a business are performing

The important performance ratios are:

Gearing Ratio:

• Gearing ratio shows the balance between the debt and equity in the business
• It is calculated as total borrowings divided by net worth of the business
• It is important to maintain a healthy balance between borrowings and owner’s capital, with owner’s capital being higher than debt in order to carry on business operations independently and away from the daily scrutiny of creditors

Debtors Turnover Ratio:

• Debtors turnover ratio indicates the number of times your debtors pay you over a year
• It gives you insight into the time of cash flow from credit sales
• Debtors Turnover is calculated as Net Credit Sales divided by Average Trade Debtors
• If the debtors turnover is high, it means you are getting paid more frequently. Say, if it is 6, it means that you are collecting your sales once every 2 months. On the other hand, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors.

Creditors Turnover Ratio:

• Creditors Turnover Ration, on the other hand, shows the number of times you make payments to your suppliers.
• It is calculated as Purchases divided by Average Trade Creditors.
• A high creditors turnover ratio signifies that the creditors are being paid promptly. This shows that your business is highly credit worthy. However a very favorable ratio to this effect also shows that your business is not taking the full advantage of credit facilities allowed by the creditors.

Stock Turnover Ratio:

• This ratio measures how fast the inventory in your business is moving and generating sales
• It is calculated as Cost of Good Sold/ Average Stock
• A higher ratio will indicate a slow-moving inventory while too low a ratio will mean that your business is not able to manage stock levels to meet sales demands

Financial Reporting is the periodical assessment of a business’s performance. They are in the nature of records of business finances and include balance sheets, profit and loss statements, cash flow and fund flow statements.

Why is Financial Reporting Important?

Financial reporting is one of the most vital components of business information.

• It provides a summation of the financial position of a business at a given point in time
• It assists in the preparation of strategies, forecasts and budgets.
• Financial Reports are the principal method of communicating financial information about your business to outside parties such as banks, investors and creditors.

Financial Reporting Made Easy via QuickBooks Online: QuickBooks Online has been a pioneer in providing world-class accounting and bookkeeping software system for small businesses. It helps you organize your finances and keeps track of all activities related to your business. It also complies with managerial accounting standards. Since this is an online accounting tool, there is no need to install any software on your computer. All your financial data is kept securely on our servers rather than on your computer. This means that you can access your data from anywhere, anytime. Even if your computer is damaged, lost, or stolen, your data is safe and secure.

QuickBooks’ financial reports give you valuable insights into your business’s finances so that you can make better business decisions, from basic financial reports to reports for specialized business activities. Here’s a quick glance into how QuickBooks Online provides the best-in-class financial reporting tools for small businesses:

• Customise in Minutes: It’s easy to customize QuickBooks reports, so you can quickly develop report formats tailored to your unique business. Once you customize a report, you can have QuickBooks memorise it so that you can run it any time you wish.
• Get the Bigger Picture: The QuickZoom® feature shows the detail behind the reports and lets you drill down to the transaction level. You can display original transactions and analyze the numbers behind the numbers. It is easy to see summary reports on a cash or accrual–basis at any time.
• Get Drilled Down Information: Further QuickBooks has the ability to drill down from reports to specific transactions. This will give you insights into over-spends, under-utilisations, thereby giving you the opportunity to take corrective action.

A sampling of available financial reports on QuickBooks Online: Here’s a sample of the many useful financial reports you can expect in each version of QuickBooks.

QuickBooks Online - Financial Reports

For a Free Trial of QuickBooks Online, visit www.quickbooks.in/index.html

In an earlier article, we had spoken about 5 Ratios That Show Your Business’s Health. In the present article, we will tell you about those important profitability ratios which you must calculate at regular intervals in order to be on top of your financial matters.

Investopedia defines Profitability Ratios as, “A class of financial metrics that are used to assess a business’s ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor’s ratio or the same ratio from a previous period is indicative that the company is doing well.”

Profitability Ratios Help In:

• Gauging business performance
• Taking business decisions related to expansion or diversification
• Enabling lenders/investors get a clear picture of the business and make available additional resources

The important profitability ratios are:

Gross-Profit Ratio:

• Gross-Profit ratio shows how profitable your company utilizes its resources, materials, and labour
• It measures your business’s manufacturing and distribution efficiency during the production process
• Gross-Profit ratio is calculated as gross profit divided by total sales (revenue)
• A higher Gross-Profit ratio indicates that the business is cost-effective. Note that investors use the gross-profit ratio to compare the profitability of business’s in the same industry and also in different industries

Net-Profit Ratio:

• Net profit ratio is a key ratio of profitability
• It shows the amount of each sales rupee left over after all expenses have been paid
• Calculated as Profit (after tax) / Revenue
• A higher net profit ratio means that your business is more efficient at converting sales into actual profit

Operating Ratio or EBIT (Earnings Before Interest and Taxes):

• EBIT measures an entity’s profitability after excluding interest and income tax expenses
• It represents your business’s earning power from on-going operations.
• Calculated as Profit (loss) + Operating costs + Income tax expense

Cash Flow Margin Ratio:

• Cash-Flow Margin ratio is a key profitability ratio that gives insight into your company’s inner workings
• It measures how well the business’s operations are creating cash from sales
• It is calculated as = Cash flows from operating activities / Net sales
• A high cash flow margin indicates efficiency at debts collection and also a high earnings quality.

In an earlier article, we had discussed about Venture Capital – Availability and Trends in India. As emphasized in the article, you may think of turning to venture capitalists, when your start-up has taken off at a decent speed and needs the next level fuel for further acceleration and growth. Remember, venture capitalists are generally for big money requirements. Hence, consider them only when you need funding for a massive expansion or a major overhaul in your operations.

Given below is a list of venture capital funds that you may find useful:

Canaan Partners: Focusses in businesses in the technology and healthcare sector, offering a variety of support to the portfolio companies including assistance in the development and review of business strategies, with the recruitment of key senior management, in the structuring and negotiating of strategic alliances etc. Canaan’s huge portfolio includes Artspace, Business Layers, Happiest Minds, IntraLinks etc.

Nexus Venture Partners: Nexus focuses on technology, business services, agriculture and Internet start-ups. Their preferences are “capital efficient business models, innovative product, process or business model addressing a significant customer pain point, differentiated product or service that can create a competitive advantage, companies that can be standalone independent businesses, not features for another business.” Key portfolios have been Craftsvilla.com, BigshowBazaar, SnapDeal, Komli, Druva Software, Aryaka Networks.

Helion Venture Partners: Helion Venture Partners is an India-focused venture fund that has made a spate of investments in high-growth technology-powered businesses and consumer services in sectors like Outsourcing, Internet, Mobile, Technology Products, Retail Services, Education and Financial Services. Komli, Jivox, Azure Power, Agni, Mast Kalandar, NetAmbit and more have received investments from Helion.

Aavishkaar India Micro Venture Capital Fund: Aavishkaar believes in investing in early-stage entrepreneurial ventures and focusses chiefly on these seven sectors – Agriculture and Dairy, Education, Energy, Handicrafts, Health, Water and Sanitation, Technology for Development and Microfinance and Financial Inclusion. Some of the businesses where they have invested are Milk Mantra Dairy, Vaatsalya, Lets Recycle, Butterfly Fields, Desert Artisans Handicrafts and many more.

Mayfield Fund: Mayfield India invests in India-based companies that have potential to become industry leaders, with a focus on Consumer Services, Internet, Mobile, Technology & Technology Enabled Services, Logistics, and Agriculture-related Businesses. Their portfolio companies include Centum Learning, dealsandyou, Fourcee, Genesis Colors, Geodesic Techniques, Sohan Lal Commodity Management etc. Notable past successes of the team include India Bulls, India Games, MakeMyTrip and Persistent Systems.

Ojas Venture Partners: Ojas is an India-centric, technology-focused, early-stage venture capital funding firm backed by one of the early captains of Indian IT industry, Mr. Nadathur S. Raghavan, co-founder and former MD of Infosys. Their portfolio includes tyfone, Ziva Software, Vizury, Radiowalla etc

The market abounds in many other venture capital firms. If you have benefitted from any of them, do let us know here.

Come end-February, and India Inc waits anxiously for the presenting of the Union Budget. A yearly exercise that affects the lives of every Indian with new laws, new stipulations, new slab rates, the budget involves strategy change for businesses.

Let’s see what this year’s budget, Union Budget 2013-14, has for small-businesses and start-ups:

• Availability of non-tax benefits for 3 years: Agreeing that “Micro, small and medium enterprises (MSME) have a large share of jobs, production and exports. Too many of them do not grow because of the fear of losing the benefits associated with staying small or medium” the budget proposed that the non-tax benefits may be made available to a MSME unit for three years after it graduates to a higher category.

• SIDBI’s refinancing capacity increased: In order “to provide greater support to MSMEs” the budget proposed to enhance the refinancing capability of SIDBI from the current level of `5,000 crore to `10,000 crore per year. This, TR Bajalia, Deputy MD, SIDBI, says will be “helpful in providing credit facilities at affordable rate by Sidbi to micro, and small enterprises through banks and SFCs. This will benefit over 3.5 lakh MSEs.”

• Increased SIDBI’s India Microfinance Equity Fund by 100 crore: With the proposal to allocate another 100 crore to the fund, over and above the 100 crore already allocated in the budget, TR Bajalia said that it was “expected to expand reach of 60-70 additional MFIs, benefiting more than 12 lakh additional clients, mostly women”

• Funds to SIDBI to set up a Credit Guarantee Fund for factoring: The Budget proposed to provide500 crore to the Fund. This tool of financingwill therebybenefit small suppliers who often get stuck owing to availability of adequate financing at the right time.

• Incubation Funds Given to Academic Institutes to Qualify for CSR Expenditure: What brought cheer to young start-ups was when the Finance Minister said, “Incubators play an important role in mentoring new businesses which start as a small or medium business. The new Companies Bill obliges companies to spend 2 percent of average net profits under Corporate Social Responsibility (CSR). I am glad to announce that the Ministry of Corporate Affairs will notify that funds provided to technology incubators located within academic institutions and approved by the Ministry of Science and Technology or Ministry of MSME will qualify as CSR expenditure.” Probably one of the most impactful proposals, this will pave the way for more incubation money in the campuses and will allow angel investors to put their money on new ideas without worrying about taxes. Experts in the industry are already lauding this proposal by saying that allowing direct transfer of money from companies to incubator, rather than pulling it up centrally and then disbursing may improve the efficiency of fund allocation.

• Start-ups listing on SME Exchange: The FM also announced that start-ups can list themselves on the SME exchange, without the need to go public. This will enable the flow of greater liquidity and will also ensure that transaction costs of going public later will come down.

Do write in to us to tell us how the budget has touched your business and how you have benefitted from it.

Take a look at the Expense column of your Profit and Loss A/C. Which head of expenses stare at you for being exorbitant? Chances are that it is Salaries, Rent, Connectivity Charges, Travel Expenses and the likes. This is true for almost all people-intensive businesses.

While you, as the business owner, cannot completely do away with the above-mentioned items of expenditure, you can certainly get cost-smart and reduce their incidence to the extent possible. Here’s how:

Salaries of Employees: For most people-intensive businesses, this is a head of expense that always show the highest figures. Hence, it is largely unavoidable. But this shouldn’t dissuade you from trying to plug in leakages, wherever happening.

• Reassess the roles of your employees and find out their exact utilization during the stipulated working hours. Accordingly, re-distribute work so that every employee is rightly and fully utilized.
• Are you paying for over-time? Check if non-value added work can be reduced so that employees do not have to stay back beyond office hours, thereby minimizing overtime pay.
• Can any of the work, like graphics designing, content writing, photography, be done by freelancers? If yes, consider taking the services of freelancers who often cost less than a full-time employee. Here’s a wonderful article for small businesses on free-lancers that can help you decide – Working With Freelancers

Rent for Office Space: With prices of real-estate being northward bound in every city and town in India, rent for office space or premises leaves a severe hole in your P&L A/c, doesn’t it? Here too, you need to take a hard look and scout for ways to reduce the rental burden:

• How about working from home in the initial days when your staff-size is small and you can still manage it? You can keep rental expenditure at bay this way. After all, stories of starting from garages, sheds and one-corner rooms in the house abound in the business world!!! But before you go about setting up a home office, take note of a few dos and don’ts. This article should be helpful – Setting Up a Home Office
• Look for rentals in non-prime locations in order to save on high rent payouts. Remember, this could increase the commute charges. It is advisable that you work out the payouts in either case to take an informed decision.
• Do you have the money to invest in your own commercial property? If yes, buy the property. Not only will you save on rent, but in the long run, you can also enjoy the appreciated value of the property.
• What if you have rented a property that is too big for your current use? Check the possibility of sub-letting it so that you can recoup some part of the rent that you are currently paying.

Telephone & Connectivity Charges: Wherever possible, use messaging services like Google Chat, Yahoo Messenger or MSN to reduce phone bills. For cases when talking to the person is inevitable, consider using Skype.

For businesses that conduct most of their operations online, pick the best rates from the various internet service providers. Spend some time studying and analyzing the different rates and get the one that meets your business needs.

Investment in Capital Goods: Again, most businesses these days incur huge expenditure on computer systems, software, related hardware, etc. Depreciation for such goods is often very high as their life is short and they get obsolete with new launches in the tech-market. Hence, consider taking them on lease. Work out the arithmetic to see if leasing gives you a better deal. This article on Buying Vs Leasing can help you in your efforts.

This article is meant to be a guide in your efforts to be cost-effective and competitive in the market. Hope you have benefitted from it. We’d love to hear from you on this.

What is Bootstrapping in Business?

A number of young professionals, home-makers and even hardened executives in India are increasingly taking the leap to be their own boss. Have a business idea, have some money saved in the bank – why not bootstrap and embark on the entrepreneurial path? Investopedia defines business bootstrapping as the “situation in which an entrepreneur starts a company with little capital. An individual is said to be boot strapping when he or she attempts to found and build a company from personal finances or from the operating revenues of the new company”.

Bootstrapping, therefore, essentially means to use your own savings in order to take-off your business idea. This is all too common in the start-up world as it is often difficult to get funds from venture capitalists or even loans from banks at the ‘starting-up’ stage. Also, you may want to test your idea, see if it has the potential to take-off and assess the timeline within which the business can start making money. Hence, you may want to call the shots at this stage and take your own decisions. Bootstrapping is the way to go for you.

What are the Basics of Business Bootstrapping?

Have a Strong Business Plan: Of no use is bootstrapping if you have not thought through your business idea, assessed its viability after tying in possible loop-holes, and drawing up a basic business model replete with the revenue source/expectancy. Hence

• Identify a person from your circle of friends/network who you think can give you impartial views and confide in him/her about your business plan. He may be able to do some straight-talking with you, pin-point the weaknesses in your business plan and help you draw a stronger model. One often turns to family-members for such reviews, but remember, family-members/friends can either get too critical or too supportive thereby not providing you with the real picture.
• Take in a business partner (Here’s how you can choose a good business partner). If you identify a friend/family-member who shares your vision and itch to start-up, get together!! With a good partner, you can build on each other’s strengths and launch your own ‘dream company’.

Start Saving Money: This is the holy grail of bootstrapping. In case you have a business model in mind, make a statement of expected initial investment and start putting aside some money from your current income. If you have already started the business with your personal finances, make sure you continue the good habit of creating a reserve for your on-going fund requirements.

Stay Cost Effective: “Penny saved is penny earned” – make this phrase your guiding light!

• In the start-up phase, try to do everything on your own so that you can save on salaries. If you have a partner, list out each other’s strengths and capitalize on them such that you don’t have to hire an outsider to do a particular job.So while one of you may don the ‘Operations Manager’s’ cap, the other can take charge of marketing and selling.
• Depending on the nature of your business, try to keep rental expenses low or nil. That’s the reason why most people start from their homes/ garages.
• Take the help of guerrilla marketing and social-media marketing (like blog marketing, online marketing buzz etc) in order to keep your marketing expenses as low as possible. Should you need a website for your business, see if you get a freelancer to do it, such that the costs are low.
• The internet is a great resource that can help with information on how to do things on your own. So in case you need to make fliers/business cards/ letter heads, go online to read how you could do them on your own. Buy the required stationery from a local store and make your own stationery with a little creativity thereby saving on stationery expenses!

What else comes to your mind when you think of business bootstrapping? Share with us in this forum so that many like us can benefit.

Take a look at some of QuickBooks’ value-offerings:

Helps maintain accurate client information: QuickBooks Online is pre–filled with customer data and total charges are calculated automatically, saving you time and improving accuracy. It also helps you control how any activity is grouped and sub-totaled. QuickBooks populates the data, does the mathematics and generates the invoice when you need it. You will always know which customers owe you money and when their payments are due so you can get paid on time.

Steam-lines Your Customer Billing: You can also streamline customer billing by emailing invoices to your customers. If you bill the same customers each month, you can schedule automatically generated invoices to be delivered at regular intervals. And should you want to mail paper invoices, it’s easy to print them out, and they’ll look great.

Supports Tailoring of Invoices: QBO helps you tailor the invoices as per your business’s needs – You can easily change the invoice title, add custom fields, insert a customer message and even print a balance forward and account summary. What’s more, you can also customise the way sales forms look when you print them or email them to your customers. You can also decide whether to include your business logo, return stub, return address and email address, and how to position them on plain paper, letterhead, or emailed forms.

Access and Organize Invoices on the go: QuickBooks keeps your invoices and other book-keeping information in the cloud. This way, you can check the invoices anywhere, anytime.

Intuit offers a 30-day free-trial of Quick Books Online in India. Should you want to try it, click here – https://qbindia.intuit.com/qbosui/pages/createaccount.jsp?SKU_TYPE=INE-FRE

You could also call 1800 4195 599 to facilitate the free-trial.

It is that time of the year again when you have short-listed a handful of strategic plans for the year ahead. It is now time to put these plans into action. But before you jump into their implementation, there is just one more ‘very important exercise’ that you need to carry out – budgeting!!! After all, it is a budget that will specify the resources, revenues and activities required to carry out the strategic plans you have so carefully chalked out.

Here are a few tips that can help you make a good budget and enable you to take off with your plans:

• Be Goal-Oriented: Your budget should be your holy grail. Period. Abide by it and you will see that you are inching towards the goals that you have set out for, be it ensuring cost effectiveness, increasing revenues, plugging leaks, etc

• Be Realistic: One of the biggest reasons of a budget’s failure is the laying down of unrealistic goals – for instance, decreasing expenditure unrealistically or anticipating sky-high revenues without the backing of proper data. As you set out for this year’s budget, refer to your last year’s incomes and expenditures and make a judicious assessment of what the items under both these heads is like to be for the current year. Highlight any anticipated windfall gain or a major expenditure such that it doesn’t wreak havoc during the course of the year.

• Be Flexible: A vital part of budgeting is to create a ‘live’ spread-sheet that ropes in unexpected increases in income/expenses, or allows you take advantage of opportunities that present themselves. Hence, make sure you get on-going reports on your budget vs actuals. In addition to a column that totals your income and expenses, create a column that tracks and shows your average monthly spending, one that compares it with your budgeted monthly spending and one that projects where you’ll be at the end of the year based on your current income and spending.

• Share it With Your Team: You cannot keep your budget to yourself and expect success at the end of the budgeting period. In order to make it a success, you will need the buy-in of your team and their willingness to abide by the projections made in the budget. However, this doesn’t mean that you need to share qualified/confidential information with all and sundry in your business. Make a list of the goals that can be made public and share the same with the team. Discuss with them the changes required and get them involved in order to accomplish those goals.

• Refer To It At Regular Intervals: A key to your budget’s success is the comparison of actuals versus as budgeted at regular intervals. Chalk out a timeline within which you will refer to your budget. This could be weekly, fortnightly or even monthly, depending upon your business’s requirements. Periodical assessments will help you stay in course and achieve the near-term goals you had inked out earlier in the year

We would like to know about your budgetary practices. Do write in to us to tell us what works for you and what doesn’t.

Imagine this scenario – Your start-up has found its feet, gained momentum and is doing thriving business. But as the business owner, are you still doing most of the running around, filling in for many roles and looking after every aspect of the business? It might work initially, but after a while, you won’t be able to focus on the areas where you are really needed, thereby hurting your business. This is the time to bring in key people in key positions – who bring in their own specializations, strengths, learnings and allow you the time and energy to concentrate on growth strategies.

One of such key people is the person you bring to manage the business’s finances – the Chief Financial Officer or CFO. He is particularly important as every small action/initiative of the business has financial implications. The decision to bring on a finance chief depends on a lot of factors. Here are a few pointers to help you decide when to hire a CFO for your small business.

Financial Reporting Requirements

You have a third party accounting firm to look after your taxes and payroll but as your small business grows, that is not enough. Your financial reporting requirements become complicated and you need a dedicated full/part time person to look after your accounting books, bank accounts and tax planning. A CFO’s expertise can help you with preparing, analyzing and interpreting financial statements.

Expansion and Diversification

If you are producing/servicing from a single site for a few clients, your financial requirement are easy and simple to handle. But once you decide to expand your business geographically and diversify into multiple product-lines/ service-lines for numerous clients, your operation becomes more complex. It is in this stage of rapid growth/major expansion, that a CFO can prove to be vital owing to his strategic advice and ability to handle complex financial management.

Financial Guidance

Business growth entails stronger internal controls and measures to deter fraud, forecasting budgets, pricing jobs and staffing and handling compliance. A CFO is best suited to put in place teams, systems and controls for these ensure that the business is in good health as it steers towards expansion.

Raising Capital

A CFO can make sure that you have a strong financial plan outlined to guarantee additional funding when you need it. So if you are:

• applying for a credit at the bank or looking for additional capital from investors or lending institutions or
• planning an Initial Public Offering (IPO), or more complex money raising tactics

a CFO can add value to your small business accounting team.

Shouldering Responsibilities

Lastly, if you are suffering from insomnia or high stress because:
• you are encountering cash flow problems as you don’t know how much money you need to pay bills or when or
• you need operational metrics to indicate whether you are on track or
• or you are having a tough time handling operational and financial issues

a CFO can prove to be a priceless asset for both you and your business.

Remember, not every small business needs or can afford a CFO. You may find the need of a CFO when your operation reaches a certain level of complexity like big staff, engagement in mergers and acquisitions, need of a financial audit etc. You may even think of hiring a Consultant as it can be a cost-effective way to get the specific services you need, when you need them.

How frequently do you enquire about the health of your business? Remember, it is not enough to simply check your profitability statements and your balance sheets. Along with these, you need to periodically check your business against the numbers that a handful of ratios throw up. These ratios come from various areas – the business’s operations, inventory management, profits, loans and investments. Big or small, new or old, financial ratios are a mirror of your business’s health. They help in:

• Keeping you updated about your current profitability and identify the components that are attributing to it
• Ascertaining the business’s solvency position and helping you plan your loan repayments judiciously
• Identifying the business’s strengths and weaknesses and hence, take adequate measures to stay on course
• Estimating future trends and make strategic plans

Here are the top 5 ratios that you can bank on to speak the truth about your business:

Debt-Equity Ratio:

• This ratio indicates the proportion of equity and debt used by your business to finance its assets.
• Calculated as Total Liabilities / Shareholders Equity
• Too high a debt-equity ratio indicates that your business is too dependent on outsider loans, while if the ratio is too low, it will indicate you are not taking optimum opportunity of available loans and are instead, risking your own capital.
• The ideal debt-equity ratio is 2:1

Current Ratio:

• This ratio shows your business’s ability to pay back current/ immediate liabilities
• Calculated as Current Assets / Current Liabilities
• Too high a current ratio will indicate that your business is not utilizing its working capital optimally, while too low a ratio indicate that it’s short-term position is not very sound
• The ideal current ratio is 2:1

Return on Investment:

• This ratio is a measure of performance
• It evaluates the efficiency of an investment or to compare the efficiency of a number of different investments
• Calculated as (Gain from investment – Cost of Investment)/ Cost of Investment

Net-Profit Ratio:

• Net profit ratio is a key ratio of profitability
• It shows the amount of each sales rupee left over after all expenses have been paid.
• Calculated as Profit (after tax) / Revenue
• A higher net profit ratio means that your business is more efficient at converting sales into actual profit.

Stock Turnover Ratio:

• This ratio measures how fast the inventory in your business is moving and generating sales
• Calculated as Cost of Good Sold/ Average Stock
• A higher ratio will indicate a slow-moving inventory while too low a ratio will mean that your business is not able to manage stock levels to meet sales demands

Which are the ratios that you bank on for your business’s financial and performance analysis? Are they different from the ones we listed above?

Times are all extremely demanding on the economic front and every rupee collected on time from your customer gives you the much-needed liquidity. One of the most decisive ways of ensuring payments on time is by having a clear credit policy for your customers and enforcing the same with the required assertiveness. A clear-cut credit policy has more benefits than just this though:

• It helps you stay abreast of your client’s financial position and helps in pre-empting bad debts
• It also helps you to treat all your customers on a level-playing ground. You can emphasise that none of your customers are treated unfairly.

Is a credit policy applicable to all? Remember, a credit policy is not applicable to over-the-counter-payment business models where a client is bound to pay immediately upon receipt of services – Eg. retail, beauty salons, online portals etc. Instead, this applies to businesses like small agencies — advertising and media agencies, video makers, event management unit etc where payment is upon raising invoices after a stipulated period.

Step-by-step approach of putting a Credit-Policy in place: The following clear steps, if followed in principle and true spirit, will help you keep your business protected from non-payment of dues and stifling liquidity conditions.

• Decide the Payment Terms: Upon entering into a business relationship ship with a client and agreeing on the scope of work, the next step is to agree on the pricing and subsequently, the payment terms. Make sure that the payment terms are specific and do not leave any room for ambiguity.
- Communicate the payment terms to the customers and get his agreement in writing
- Communicate the same to the employees who will be servicing the client
- Lay down the choices for the modes of payment available

• Decide the Credit Limit: Next, decide on the credit limit that will be given to the customer. Make a clear policy on cash vs credit depending on the business’s requirements.
- Enumerate the minimum amount of cash that has to be paid at the start of the deal.
- And then specify clearly what percentage of the remaining dues will be payable within what period

• Specify guidelines on Invoice Raising: Make sure it includes the following:
- The time within which the invoice will be raised once the ordered goods/services have been supplied.
- Be meticulous about including every relevant data like the purchase order number, delivery procedure, details of the goods/services supplied, the amount due and VAT details.

• Specify redressal for non-payment/ bad debts: Outline clearly in your credit policy how you will deal with late payments or no payments.
- In case of late payment, mention the amount of penalty that will be payable
- In the case of bad or doubtful debts, determine when and what level of action to take, whether this is a simple phone call, legal action or outsourcing to a debt collection agency

• Specify recourse to legal action: Finally, provide for breach of contract in your credit policy. Mention clearly the legal recourse your business will be forced to take in case of non-payment of dues beyond a stipulated time and after regular follow-ups and reminders.

In an earlier article, we enumerated the regulations as laid down under the Employees’ Provident Fund Scheme (EPS) 1952. In the present article, we will discuss the Payment of Gratuity Act, 1972.

Applicability:

• Any factory, business, shop and establishment with 10 or more employees working on any day of the preceding 12 months is liable to pay gratuity to its employees. Once the Act becomes applicable, it continues even if the number of employees falls below 10.
• Gratuity will be payable to an employee (nominee in case of death of employee) who has rendered continuous services of 5 years or more on his termination of employment, superannuation, retirement or resignation. Completion of continuous service of five years is not necessary where the termination of employment is due to death of disablement.

Amount of Gratuity: As per the Act, the gratuity amount is 15 days’ wages multiplied by the number of years put in by your employee. It is calculated as follows:

(Basic+DA / 26) * 15 * No. of completed years of services, where DA=Dearness Allowance

Payment of Gratuity: The employer, within 15 days of receiving an application for gratuity payment, has to

• If the claim is found true upon verification — Issue a notice in Form ‘L’ to the applicant employee ( or nominee/legal heir) specifying the amount of gratuity payable and fix a date within 30 days of receipt of the application for payment of the same
• If the claim for gratuity is not found admissible — Issue a notice in Form ‘M’ to the applicant employee (nominee/legal heir) specify the reasons why the claim for gratuity is not considered admissible.

In both the above cases, a copy of the notice has to be sent to the controlling authority.

The gratuity payable under the Act shall be paid in cash or in Demand Draft or bank Cheque to the eligible employee

Directives to Employer’s:

• Submission of notices to the Controlling Authority:

o Notice in Form A within 30 days of being applicable to The Payment of Gratuity Act
o Notice in Form B with 30 days for any change in the name, address, employer or nature of business.
o Notice in Form C 60 days prior to the closure of an establishment informing of such closure

• Every employer has to obtain insurance for his liability for payment towards the gratuity under this Act from a prescribed insurer. He will be exempt from taking the insurance in case he has established an approved gratuity fund in respect of his employees.
• In case the employer doesn’t pay the gratuity within the prescribed time to his employee (or nominee), the aggrieved employee can apply for redressal to the controlling authority. The controlling authority after investigation will issue a certificate for that amount to the Collector, who shall recover the same, together with compound interest at such rate specified by the Central Government. In case of delayed remittances of contributions, administrative / inspection charges by an employer, he has to pay both interest and damages for the period of delay.

No matter the size of your business, two requirements stay compulsory in every stage of your business’s life-cycle – first, accounting and second, tax/tax returns filing. So what if you have a Chartered Accountant who takes care of both? As a business owner, you ought to know how your incomes/expenses, profits/losses show up in your accounting books and finally impact your taxability.

Towards this end, we will bring you a series of articles that will tell you about how to account for various categories of account heads. In this article, we will discuss Fixed Assets in and out.

What is a Fixed Asset?

Fixed asset is an asset of a business held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.They can be categorised as:

• Vehicle: This will include the car you use for business purposes provided it is registered in the business’s name or the name of the founder(s)
• Furniture & Fixtures: This will include the desks, chairs, workstations and the other fittings in the work-station in your office
• Computer Equipment: As the name suggests, this will include the desktops, laptops, routers, dongles, data-storage devices used for business purposes.
• Office Equipment: This will include the air-conditioner, water-dispenser, microwave, telephone, refrigerator, etc that are used in your office or business premises

What is the cost of a particular Fixed Asset?

The cost of a fixed asset for the purpose of accounting and taxation will include not only the cost of the asset, but also the expense(s) that has been incurred to get it into working condition like delivery charges, acquiring charges such as stamp duty and import duties, costs of preparing the site for installation of the asset, professional fees, such as legal fees and architects’ fees etc

How to Account for Fixed Assets?

For every fixed asset, the law makes it compulsory for a business to provide for depreciation of the asset every year of its useful life. Accounting Standard 6 issued by the Institute of the Chartered Accountants of India defines ‘depreciation’ as “Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is predetermined.”

The amount to be charged as depreciation depends on the total cost of the asset, expected useful life of the asset and its residual cost. There are several methods of allocating depreciation over the useful life of the assets. Those most commonly used are the straight-line method and the reducing-balance method. Choose the method depending on the type of asset, the nature of the use and circumstances prevailing in the business.

Income Tax Provisions:

The Income tax Act provides for charging depreciation against the Profit and Loss Account of a business. However, section 32(1) lays down conditions for claiming depreciation. They are:

a. The assets must be owned, wholly or partly, by the assessee.

b. Co-owners are entitled to claim depreciation to the extent of the value of the asset owned by each co-owner.

c. The asset should be actually used for the purpose of business or profession of the assessee.

d. Depreciation is not allowable on the cost of land.

e. Depreciation is mandatory from AY 2002-03 and shall be allowed or deemed to have been allowed irrespective of claim made in the profit & loss account or not.

f. Where the asset is not exclusively used for the purpose of business or profession, the depreciation shall be allowed proportionately with regards to such usage of assets (sec. 38).

Section 32(1) provides that depreciation is to be computed at the prescribed percentage (Click here for depreciation rates) on the written down value of the asset, calculated with reference to actual cost of the assets minus the depreciation already charged.

Do write in to us to tell us if you have found the information in this article useful/relevant.

Growing businesses have, amongst other things, growing regulatory requirements to comply with. One such compulsory regulation is that of provident fund for employees under the Employees’ Provident Fund Scheme (EPS) 1952. This Act was enacted by Parliament in order to provide financial security and stability to employees in an event that the employee is temporarily or no longer fit to work or at retirement.

Employee Provident Fund (EPF) is implemented by the Employees Provident Fund Organization (EPFO) of India.Let us see what stipulations have the law laid down for business owners/employers to follow so as to comply with the provisions of the EPFO:

Applicability:

• Any business/establishment with 20 or more employees working in any one of the 180+ industries (given here) should register with EPFO.
• 12% of the Basic, DA, and cash value of food allowances have to be contributed by the employer and employee each to the EPF account of the employee. The rate of contribution is 10% in the case of following establishments:
o Any covered establishment with less than 20 employees, for establishments cover prior to 22.9.97.
o Any sick industrial company or company with accumulated losses equal to or exceeding its entire net worth.
• Pay administrative charges at 1.10% of emoluments
• For exempted companies under P.F. Scheme, an employer is liable to pay only inspection charges @ of 0.18% of emoluments.

Directives to Employer’s:

• Enrol under EPS all categories of employees including employees engaged by contractors and piece-rated, hourly-rated employees
• Remit the contributions and administrative charges to the EPFO Office in your city before the 15th of the following month.
• File the timely returns in prescribed forms:
o Initial – Form 9, Form 3(P.S.), Form 5A.
o Monthly – Form 12A, Form 5, Form 10 and Challans for remitting the dues.
o Annual – Form 3A and 6A after reconciliation with Challans and form 12A.
o Duly attested Form No.2 and the claims forms submitted by the employee/ legal heirs/ nominees.
• Make available all relevant records for inspection of visiting officials

Delay Charges:

In case of delayed remittances of contributions, administrative / inspection charges by an employer, he has to pay both interest and damages for the period of delay.

• Interest is payable @ 12% on the amount of remittance due
• Damages are payable as penalty from 17% to 37% p.a. depending upon delay.

When is an Employer Exempt?

• When an employee or class of employees get Provident Fund benefits on par with or better than statutory provisions – Exemption should be applied for in Form 1 under Para 27 of EPS
• The employer can seek exemption from P.F. Scheme for the entire establishment if the majority of the employees also consent for exemption, subject to certain conditions governing grant of exemption and certain formalities.

Hope this article has helped you know the requirements/ applicability of your business under the Provident Fund laws. Do write in to us with your feedback.

Just how taxation requirements spook many new business owners, accounting or book-keeping necessities of a business too can make an entrepreneur want to scream for help. Ledgers, Trial Balance, Bank Reconciliations Statements, Cash Flow Statements, Profit & Loss A/c, Balance Sheet – a number of new entrepreneurs often find themselves groping in the dark trying to follow the accounting principles and standards as per the enforced accounting laws. Are you one of them?

Qualified Accountants are then your saviors. An accountant will relieve you of not only the basic book-keeping, but will also draw up the final accounts at the end of a fiscal year, make tax assessments and file returns.

How to Choose your Accountant: Let us then see what it takes to get an ‘accounting messiah’ on board your business!!!

But first, make sure that your hunt for the ‘right’ accountant is not hurried. Talk to other business owners in your area of operation, look up the internet/yellow-pages, newspapers and business classifieds for a few names. Once you have short-listed a few accounting firms, draw up the following interview pointers in order to zero-in on the ‘right guy’.

• Qualification: Check whether the accountant has his qualifications in place. He/she should be a Chartered Accountant from the Institute of the Chartered Accountants of India, and has a Certificate of Practice from the Council of ICAI

• Back-Ground Check: This is of vital importance, as the person you will employ as your accountant, will have access to sensitive business information like your pricing, profitability, taxability etc. Make sure he is of sound and impeccable character, and has not been involved in any instance of cheating/mal-practise in the past. Getting a reference check done is a very good way of assessing his credentials.

• Experience: Once you have checked and verified his qualification, you need to assess his experience in accounting and finalisation of books.

For example, a relative new-comer may not be able to give you deeper insights into your business’s dynamics. But at the same time, he may exhibit the right passion and zeal, believe in your vision and have the drive to go the extra-mile to realise the dream.

• Understanding of your Business Line: Make sure that the accountant has adequate exposure to the industry/line of business to which you belong. Without this, he may not grasp the nuances of your business’s operations.

For example, if your business is on the e-commerce model, make sure he understands everything associated with online businesses, like payment gateways, payment options etc

• Additional Services: Check if he can bring to your business specialist business advice which is over and above the basic accountancy services and tax duties.

For example, check if he can offer you financial planning, refer any connections, know the local banks and have contact with venture capitalist/ legal advisors that may be useful for your business.

• Cost (Fees/ Salary): Finally, get a quote on his services as an accountant for a calendar year, and see if he will charge extra for doing up your statutory books/returns at the end of a fiscal. Negotiate for a fixed fee that will include the maximum number of services in the deal.

No matter the size of your start-up/ business or even its age, one activity that you should never put off for a later date is accounting for your incomes and expenses. This is important not only for the legal or taxation point of view, but also for the fact that you as a business owner need to be aware of the overall health of your business on a real-time basis. And this is possible only when your business accounting is on track.

Let’s read about a few instance of accounting mistakes that businesses commonly make and how you could avoid them:

• Irregular Updates: Because of the frustrating nature of keeping accounts, many businesses/ start-ups do not update their accounts on a regular basis. They often put it off for weeks. This results in forgetting transactions and missing them completely from the accounts books.

Way Out: Make it an everyday practise to jot down your financial transactions at least in an excel sheet. In case you still do not have a computer to work with, make every day entries in a book. Remember to post the transactions against the actual date they took place. On the day when you sit to do the consolidation, you will be happy to find that nothing was missed and the process was faster without any unnecessary stress.

• Misclassifying Expenses: Even with good accounting software, it is common to make classification mistakes while accounting. For eg, interest on deposit may be clubbed in revenue or bad-debts may be treated as an expense instead of a reduction from the debtors account. In such cases, your Profit & Loss A/C will not state the correct amount and in all likelihood, your Balance Sheet will not tally.

Way Out: Periodically check your income and expense head to see all entries are right. Similarly check the asset and liabilities to ensure that depreciations, write-offs are accurately recorded.

• Non-Adherence to Accounting Principles: Accounting for your business should strictly follow the basic accounting principles of consistency, materiality, matching, revenue-recognition, going-concern etc. Non-adherence to these can amount to charges of falsification and misrepresentation.

Way Out: The accounting principles and guideline are easy to understand and follow. Make sure you read about them in details and apply them in every instance of recording your transactions. Click on to this link for a quick glimpse – Accounting principles made easy

• Insufficient Accounting Software: Many start-ups/new businesses do not have the capital outlay required for buying accounting software and end up maintaining their accounting records in a haphazard manner.

Way Out: Remember, no matter how small you are, keeping your accounting records in a true and fair manner will help you gain confidence of banks/business partners who might be keen to invest in your business. Scout the market for software that best suits the line of business you are in. Quick Books Online, is one such software that is easy to learn and quick to operate.

Do matters related to taxation make you see stars in broad daylight? Well, fret not. Every start-up/ small business owner goes through a period of heightened ‘confusion’ regarding tax matters when he starts off as an entrepreneur.

In the article below, we give you a basic guide on how you should compute your business income and what all expenditures are allowed to be deducted from the revenue that you earn or will earn in the course of your business.

Note: This article aspires to serve only as a guide and as such, does not have an exhaustive list of items of expenditure that are allowed to be deducted in order to arrive at the business income for a particular assessment year.

• Expenditure for Premises Used: Any amount spent towards rent for the premises used, repairs undertaken, any taxes/rates paid to municipal corporations and premium paid in respect of insurance against risk of damage or destruction of the premises.

• Repairs & Insurance of Machinery/ Furniture: Amount spent towards current repairs of machinery or furniture and insurance premium paid in respect of insurance against risk of damage or destruction thereof.

• Depreciation: Depreciation provided for tangible assets like premises, furniture, vehicle used for business, etc and non-tangible assets like know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature.

• Preliminary Expenses: Expenditure in connection with preparation of feasibility report, project report, conducting market survey or any other survey necessary for the business and engineering services relating to the business.

• Premium for Stocks/Stores: The amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession

• Interest on Loans: The amount of the interest paid in respect of capital borrowed for the purposes of the business

• Payment for Provident Fund/Gratuity: Any sum paid by way of contribution towards a recognised provident fund or an approved superannuation fund and an approved gratuity fund

• Bad Debts: The amount of any bad debt or part thereof which is written off as irrecoverable in the accounts for the previous assessment year

• General: Any expenditure, not being in the nature of capital expenditure or personal expenses, laid out or expended wholly and exclusively for the purposes of the business including salary of staff, bills for the use of electricity, telephone, internet used for business purposes.

Businesses are increasingly looking at ways to cut costs and make the most of existing resources. Saving on technology costs is one option that SMBs can turn to, in order to survive these difficult times. Small and medium enterprises must gauge the requirements of the organisation. They need to identify what kind of office supplies they require. Each enterprise has different needs. Identify whether colour printing is needed, or whether a black and white laser printer would suffice. If faxing and scanning are also required then a multi-functional printer could help save money and space by eliminating the use of multiple machines. There are several new printing solutions that help obtain more value from investments. These latest printing solutions immediately drive down printing costs and reduce energy use.

Following are the ways by which SMBs can save on printing costs:

Responsible printing: Businesses should encourage employees to use the modes that lead to reduction in the amount of ink used. When printing slideshows, employees should format them so that multiple slides fit on a page. “Draft” mode printing should be a default setting for all workstations.

Manufacturer’s guidelines: To avoid printers from getting burned out, SMBs should stay below the maximum printing volume recommended by the manufacturers. If you continuous print over capacity on a given machine, the time has come for you to replace that printer with a higher-volume one. Performing regular audits of machines in your set up will help identify overused and underused ones.

Go green: Green is the way to go and many businesses are making efforts to operate in a way that’s more environmentally friendly. The best part is that by going Green your business can also save money. Your business can develop a roadmap to reduce its impact on the environment and reap energy savings. This can be achieved by using breakthrough technologies like energy-efficient printers.

Duplex-Capable devices: SMB customers can reduce paper consumption by at least 30 per cent by deploying Duplex Capable devices or setting configuration to duplex printing defaults at the network level.

Multifunctional printers: SMBs are always on the lookout for a printer that is packed with features and has affordable running costs. Printing solutions that provide easy-to use multi-function capabilities and efficient print speeds are ideal for small businesses looking to minimise costs.
 
Whether your business is running smoothly or taking a hit, it is always advisable to cut costs. All SMBs are tightening their budgets to keep pace with rising prices. But the good part is that smart printing solutions are now increasingly available and a wise choice can help the small enterprise in more ways than one.

World over, businesses are saving millions of dollars in costs and decreasing inventories while improving efficiency and customer satisfaction with effective Supply-Chain Management. Can it be applied to small businesses and start-ups too?

Supply chain has been defined to be ‘the movement of materials as they flow from their source to the end customer’. Essentially, it includes:

• Purchasing of raw materials
• Manufacturing the products
• Warehousing the finished product
• Transporting the product to retail outlets

For effective functioning of all the above-mentioned components, supply-chain management also includes demand planning, supply planning and customer service.

Can Small Businesses benefit from Effective Supply-Chain Management?

Yes. Small businesses can take advantage of a well-drawn out supply chain strategy for following reasons:

• Small businesses are very flexible. Mostly, they are still very young and developing and hence, are willing to re-engineer existing processes.
• Being small, they are integrated in nature whereby various business functions are usually performed by one or a few persons working together. This makes decision-making faster.

Ways to Strengthen your Supply-Chain:

Being a small business, you might not have the required clout or power to enter into strategic partnerships or even tap those outstation sources with temptingly low cost of raw materials. However, this shouldn’t stop you for aiming for a seamless supply-chain strategy.

• Track all your materials and ingredients: Track all your materials and ingredientsin the manufacturing process, find out their sourcing details and evaluate them further in order to get the best quality at the minimum cost with safety being a priority.

• Identify key components and risk points: Study your supply-chain thoroughly to check for key components and risk points. This will give you visibility on the ingredient/process that can bring the production to a grinding halt. Similarly, the risk points will enable you to be prepared with contingency plans.

• Complete Participation: Your efforts to have a cost-effective supply chain management will not be successful until you take the buy-in of your employees, train them adequately to handle the operations without any hitch and empower them to take business decisions.

Once you are in control of your supply chain, you will discover that it has proved beneficial not only to your production process and people, but also your sales and marketing efforts. Remember,customers today are spoilt for choice and are passionate about product quality and safety. Therefore, reinforce the benefits of supply chain management in your business highlighting the profitability and marketability that comes with quality, and see yourself grow faster.

Money is a limiting factor for most new businesses, start-ups. And often in both these cases, the capital outlay on office space, storage of inventory (‘godown’ space), office equipment and fittings, IT infrastructure, etc add up to massive figures. Many first-time entrepreneurs get discouraged at this level when they see such huge amounts of fixed expenses in their business plan. So what is the way out? What if you don’t have the money or better still, don’t want to block your capital on these expenses? Is there an option? Yes, you could lease instead of buying!!!

In this article, we talk about the pros and cons of a buying vs leasing option.

Buying — Pros and Cons:

• Buying will give you ownership and it makes business sense to buy when the property has a long useful life and is not likely to become technologically outdated in the near future
• The Income Tax Act also allows for deduction of the cost of assets purchased over stipulated years
• And then of course, there are tax savings for almost any business equipment through depreciation.
• However, for some business owners, purchasing business asset may not be an option because the initial cash outlay is too high.
• If you purchase high-tech equipment, you run the risk technological obsolescence, and you may be forced to reinvest in new equipment long before you had planned to.

Leasing — Pros and Cons:

• The primary advantage of leasing business asset is that it allows you to acquire it with minimal initial expenditure
• Lease payments can usually be deducted as business expenses in your P&L Account, thereby reducing the net cost of your lease.
• Leases are usually easier to obtain and have more flexible terms than loans for buying assets
• It also allows businesses to address the problem of obsolescence
• However, leasing an item is almost always more expensive than purchasing it for the interest component involved in it.
• Also, often early termination of lease involves big penalties

How to decide whether to buy or lease?

Answering these basic questions can help in deciding which is more prudent:

• What is the approximate net cost of the asset after factoring in tax benefits and resale value?
• What is the financing option under both the scenarios – buying and leasing?
• What is the expected useful life of the asset? How long do you plan to use it?
• Will you need new asset or can a used one be just as good?
• How often does technology change with this asset?

Buying or leasing will differ with every type of asset. While leasing for IT infrastructure is advisable owing to the fact that technology changes are often frequent, buying your own property for housing your business may be a good idea if you have the cash.

Once again, judge every asset purchase or lease by its feasibility both in monetary and non-monetary terms. You will then realize that cracking the ‘buying vs leasing’ code is not so difficult to crack!!!

Most often than not, keeping track of daily accounting and managing books of accounts as per the applicable legislation, overwhelms entrepreneurs. After all, entrepreneurs are excited about their product/ services and concentrate mainly on creating a customer base for their offerings.

In such a scenario, it makes business sense for a business owner to deploy an accounting software that not only meets the growing requirements of a small business but which also fits in his budget and frees him off the numerous aspects of small business accounting, including invoicing, customer and vendor contact information, inventory, payroll and reporting.

An Accounting Software perfect for your growing business:

QuickBooks Online (QBO), is an accounting software that puts you in control of your finances, your time and your business. The package includes the following benefits:

Consolidated customer and supplier data: It stores details of an unlimited number of customers and suppliers.

Track sales and expenses: It helps you understand your cash flow and how your business is doing so that you can make better decisions.

Easily creates and manage invoices: QBO helps design and create professional invoices, print or send them via email. It also lets you keep track of who owes you money and whether or not you’ve been paid.

Instant access to critical information and reports: With QBO, you can check your P&L A/C, Cash-Flow Statement and Balance Sheet at the click of a button. You can also drill-down into business knowledge with pre–built and customisable reports.

Easy Service Tax & VAT Computation: QBO computes service tax and VAT for you in a single click. It is specifically designed for Indian businesses.

Professional estimates: It also enables you to create professional–looking quotes and proposals for your customers.

Get your Company Snapshot: The Company Snapshot screen in QBO tells you, every day, what you’re making, what you’re spending, how you’re doing compared to last year and more.

Handle foreign currencies: This feature helps you to manage your international customers with ease – trade in multiple currencies and switch between them using up–to–the–minute exchange rates.

And What’s More:

• QBO is completely web-based and hence, you don’t have to install or download traditional software, or worry about operating-system compatibility. You simply launch your web browser and go.
• You can log in to QuickBooks Online from any Internet–connected computer, and hence, the freedom to work from anywhere, anytime.
• QBO connects users in different locations by allowing multiple users to access your account. You can specify permission levels to control what type of data each user can see or modify.
• Switching to online accounting is simple — QuickBooks Online imports your existing customer contacts from Microsoft Excel®, Outlook, or Gmail.
• QBO automatically backs up your data every two hours and meets the highest online security standards for data storage.
• No prior accounting knowledge is needed to use QBO. Get started immediately with no software to install, free upgrades and free unlimited customer support 365 days a year.

Access QuickBooks Online Free Trail – www.quickbooksonline.in

If you are a business owner with regular staff on your payroll, you are bound by Section 192 of the Income Tax Act, 1961 to deduct income tax at source on the estimated income of the employee(s) under the head ‘salaries’.

When is TDS applicable?

• Payment is made by you to your employee
• The payment is in the nature of salary and
• The income under the head salaries is above the maximum amount not chargeable to tax

When is tax to be deducted?

You, as the employer, at the time of actual payment of salary to the employee, have to deduct the tax at source. When advance salary and arrears of salary has been paid, you have to take the same into account while computing the tax deductible.

Rate of deduction of tax

Tax is to be deducted at source on the amount payable at the average rate of income tax. This is to be computed on the basis of rates in force for the financial year in which payment is made. The Finance Act of each financial year specifies the rates inforce for deduction of tax at source. For F.Y.2012-2013 rate of TDS is specified in Part-3, Schedule of Finance Act 2012

Average rate of deduction

Compute at the beginning of the financial year, the total salary income payable to an employee during the financial year. Also take into accountany other income as reported by the employee. After considering the incomes exempt, deductions and relief, the tax liability of the employee should be determined on the basis of the rates in forcefor the financial year. Every month, 1/12 of this net tax liabilityas computed above is required to be deducted.

Deposit of tax in Government account

The tax so deducted from your employees’ salaries should be deposited to the credit of the Central Government in any of the branches of RBI, SBI or any authorised bank within:

• Before 30th day of April where income or amount is credited or paid in the month of March
• In other cases, payment has to be made within 7 days from the end of month in which deduction is made or Income Tax is due
• Inspecial cases with the prior approval of joint Commissioner of Income Tax, TDS can be deposited quarterly, i.e. by 7th of July for the quarter ending 30th of June, by 7th of October for the quarter ending 30th September, by 7th of January for the quarter ending 30th of December and by 30th of April for the quarter ending 31st of March.

The payment can be made either in cheque or cash or draft drawn on local banks.

Issue of T.D.S. Certificate

You need to furnish a certificate to your employee to the effect that tax has been deducted along with certain other particulars. This certificateis usually called the TDS certificate or Form No.16. The certificateis to be issued in your own stationery.

Remember, the Income Tax Act provides for penalties for defaults inrespect of deduction of TDS and deposit thereof into Central Government account. The law is even stricter in case the TDS has been deducted but not deposited into Government account in the prescribed manner. In such a case, besides penalties, the law provides even for prosecution. Therefore, as a business owner, it is imperative that you are well conversant with the provisions relating to Tax Deduction at Source on Employee Salaries.

Go green and save: Adopting eco-friendly practices in your business not only help you keep costs down but also give you the added satisfaction of helping the environment. A few easy ways to go green include: Use energy-saving light-bulbs. Buy environment-friendly company vehicles. Recycle and reuse scrap paper and old envelopes. Don’t leave office machinery on standby. Pick an optimal temperature to operate your air conditioner at. Start a car pool for colleagues. Use laptops instead of desktops as they consume approximately 90 per cent less energy.

Use office supplies prudently: Your small business is competing against various competitors and your profit margins depend on how well you can utilise your resources. Office supplies like stationery can be misused. Keeping a close watch on purchases of such supplies can help tackle the problem of wastage. Differentiate between what is essential and what your small business outfit could easily do without. Bulk buying is always more economical than buying once a week. For example, you could buy printer ink – a costly item on the supplies list –in bulk, or use recycled printer cartridges.

Trim your phone bills: Phone usage is a necessary part of running your small business. Look for ways to reduce this expense. Spend some time on research and get plan that gives you the most mileage. You could also reduce the number of phone lines or replace the current service with an internet based service.

Utilise unused office space: Unused office space can be used for subletting. This is a good opportunity to share the rent and slice off a big portion of your overhead expenses.

Hire interns or students: When you need someone to handle administrative duties, documentation, research or related tasks, look for an intern or student. The temporary assignment can give the student the exposure he or she is seeking while allowing you to get the job done at a reduced cost.

Leverage the internet: Explore the possibility of using internet-based technologies wherever possible as they allow low cost ways to negotiate with clients. Microsoft’s “Live Meeting” technology and similar web conferencing tools can save you both valuable time and money.

Clean up your mailing list: Update your mailing list by removing changed addresses and inactive customers. No letter sent from your end should be sent back or thrown away.

Use the internet to reach potential customers: Your small business needs the required publicity and customers need to be updated about new products and services. Advertising by mail can be a low cost option for small business advertising. Through email newsletters customers can be alerted to new items or discounted services.

Reduce travel expenses: Look out for discounted fares when booking tickets. For example, travelling employees can keep costs down for your small business by opting to share hotel rooms whenever feasible.

Be prepared for unforeseen situations: Buying appropriate insurance can help your small business save money in the long run. Make a list of situations that could be disastrous for the business and explore what your coverage options are to protect you from these contingencies.

A business enterprise in India is subject to various types of taxation, both direct and indirect, depending on the type of business it is in. A few taxes that are common across the board, whether small or large business, are Income Tax, Service Tax, TDS, Sales Tax/ VAT.

In our continuous endeavour to help you succeed in your business venture, we at Intuit Small Business India, have introduced a new section that will make taxation matters easier to deal with. Introducing the FREE Tax Guidance, an exclusive service where you can ask all taxation related queries to our expert Chartered Accountants.

You can ask Questions via Facebook also.

In case you find Facebook easier to navigate, you can find the forum easily on the Intuit Small Business India page on FB. Click on the Free Tax Guidance tab and type in your question.

The salient features of this forum are

• It covers taxes such as Income Tax, Service Tax, Tax Deducted at Source (TDS) and Sales Tax/VAT.

• Our panel of CAs answer the queries, provide guidance within one working day.

• No Fees charged. This service is FREE.

• Questions can be kept confidential by simply sending it to the dedicated email
taxadvice@intuit.com

Peek into the tax related queries answered so far:

• Q – What tax is applicable to music producers/music director?

o A – Music director/producer would certainly be subject to the Income tax, additionally, the activity is covered u/s.section 65(105) (zzzzt) of the Finance Act, 1994 for levy of service tax a copyrighted activity, hence, would also attract the service tax. Music producer Company, manufacturing CDs and DVDs or other media recorded with music would.

• Q – Are CST @ 2% and excise duty a part of production cost or can be treated as input VAT credit??

o A – CST paid on purchase of goods is not available as Input Tax Credit, hence, should be treated as a part of production cost, whereas, Excise Duty paid on purchase of raw materials can be claimed as CENVAT credit while paying Excise Duty on final product, hence, should not be considered as a part of production cost, if the final product manufactured by the unit is subject to Excise Duty.

• Q – Service Tax – Transportation Service – I am transport service provider, whether service-tax is applicable to it? If yes, at what rate?

o I presume, it is Transport of Goods by Road Service. Yes, it is subject to Service Tax u/s.65(105)(zzp) of the Finance Act, 1994. An abatement @75% is available, hence, the service tax would be charged on 25% of the Gross amount charged from customer. Presently, the Service Tax rate is 10% plus 2% education cess and 1% SAH education cess, making it 10.30%, hence, effective service tax on the said service comes to 2.575% (25% of 10.30%) upto Mar 31, 2012. As the Service Tax rate has increased to 12% wef April 1, 2012, the effective rate would be 3.09% (25% of 12.36%) from 2012-13.

Intuit Small Business India’s Tax Guidance forum is user-friendly, business-centric and has been made for the benefit of small and medium businesses in India. Go ahead and ask as many questions that you may have.
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Start-up costs for a new business can be considerable — purchase of goods and equipment, marketing costs, payment to employees and the list goes on. As it’s not always feasible to bootstrap your way through major expenses, you may want to consider external funding. Loans from commercial lenders like banks or private lending institutions may be an option, but consider the pros and cons of seeking a commercial loan.

Pros

• While commercial lenders will review your business plan detailing the potential use of the funds that you’re seeking, they neither have a say in your business operations, nor in how you manage your funds.

• Commercial lenders also are not entitled to your profits. Their only look-out is the debt repayment.

• A business loan usually has a low interest rate in comparison to many other funding options (like credit cards, finance companies) though the repayment terms of the numerous commercial loans may vary.

• The interest payments on your business loan can be deductible on your taxes. That perhaps is one of the biggest advantages!

• A small business loan can have access to large sums depending on the actual requirements of your enterprise. The money is available for immediate use, builds a credit rating (which helps in securing future loans) and also creates a good financial reputation for your business from early stages.

Cons

• For a start-up, commercial lenders follow strict guidelines and therefore require more information – thorough knowledge of your business’ potential structure and general modus operandi, information about other potential investors, and profit and cost predictions – and a lengthy review process. Lenders also need to be assured that you have a good credit rating and you are trustworthy so that you are more likely to repay the loan.

• A commercial lender’s rates are dependent upon government policy and the whims of the market. Rates may fluctuate in the early stages while profits may not be able to keep up. Remember that small business loan interest rates tend to be high in the first place (and continue to increase as you borrow more).

• Most commercial institutes will insist that you provide collateral in the form of a property asset (stock portfolio, house, etc.) in order to secure themselves. In case your business goes kaput and you cannot repay your loan, the lender can reclaim its debt by liquidating whatever you proposed as security. Hence, you risk losing a valuable asset.

• A bank loan belongs to the bank. Thus, a loan appears on the liability side of the balance sheet. It affects the valuation of your business.

Whichever source of funding you seek, remember there will be pros and cons associated with each option. Choose wisely depending on your financial status and requirement criteria.

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“Money saved is money earned”.

As a small business owner, your priorities are to perform well in the cut-throat competition and look for opportunities to grow, all the while cutting down on costs without affecting the service/product quality. For the same, you need to diligently look to control costs, small or big, and make sure you are not losing money due to unnecessary expenditures or leakages.

Salaries

Employees’ salaries make a considerable chunk of your business expenses. While it is important that you compensate your employees suitably, it is also imperative to check once in a while whether the salaries you pay are justified. Try answering the following employee-related money leakages and you should be able to find out:

• Are you paying for a full-time employee when the task can be outsourced for a minimal fee?
• Are you over-staffed? Can assignments be re-jigged and consolidated to ensure maximum contribution?
Also remember, employee turnover can be very costly for a business in terms of the time it takes to re-hire and re-train staff.

Rent

Remember, office space not only costs you rent but also hidden expenses like maintenance, repairs, and utilities. You might be spending more than you bargained for. Do you really need all the office space that you are paying for? If your answer is ‘No’, look for a smaller space as per the actual needs immediately.

Billing, Collection and Payment

This is a primary area of opportunity for income optimization.

• Insist on a timely billing and collection system with your customers. Late billing and collection not only generates cash crunch but you also lose out on valuable bank interest.
• Monitoring accounts receivables will enable you to keep track of your aged receivables in order to reduce the number of days an outstanding claim remains unpaid.
• Likewise, ensure timely payments to your suppliers (of goods, small office supplies, rent or facilities). It makes no sense on losing money on late fees and interest charges. Moreover, many suppliers offer rebate on early or timely payments.

Payments for Services

• Operational Service Providers: Take a look at some of the services you require like internet or telephone connection and find out whether better and cheaper options for these services exist. Chose the rate plan that’s appropriate for your business. You can even talk to your existing relationship manager and negotiate a better deal on the current services.
• Financial Services: Compare fees, from time to time, charged by your financial institution. Are you paying more in monthly banking fees than is prevalent in the market? Can you find a better banking relationship somewhere else? If your answers are in the affirmative, talk to your current bank’s manager and ask for the same terms that you can get somewhere else.
• Professional Services: Are you paying more for consulting or professional services (legal, accounting, advertising etc.) than you should? Would you save money by hiring someone full-time for this work, or are there other less expensive ways of getting these services?

Miscellaneous Stuff

It might seem like a small value, but such small savings counts a lot in the long run. Little expenses like office supplies, tea/coffee, and washroom supplies for the staff can add up to be a big expense. This doesn’t mean you should cut out all the extras. Just be a little more attentive on what you spend, make sure you shop around for the best prices and don’t purchase things that aren’t needed or used.

Fixing a leak doesn’t necessarily mean simply cutting staff or expenses. It’s not just about the cost either. It’s about justifying your expenses as per your requirement and to keep a close check on the specific areas that warrant a review so that the avoidable expenses can be plugged and the entire savings scenario re-worked.

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A regular assessment of debt vs equity is of paramount importance for all businesses. In the case of a small business venture, this assessment becomes imperative as it helps in your long-term financial decisions-making.

Let’s then find out in greater detail about both the components, debt and equity, and what picture they can show of the business when seen together.

What is Debt and Equity?

As the name suggests, debt is what your business owes to external creditors. It includes include all debts/liabilities to outsiders, whether long term or short term or whether in the form of bonds, mortgages or bills.

On the other hand, equity is the fund that you have brought into your venture. And includes capital, accumulated profits, contingency funds, funds created to replace assets etc.

What is Debt-Equity ratio and how is it calculated?

Debt-Equity ratio is the relationship between the external debt and the internal funds of your business. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the business versus what you as a proprietor/partner have committed.

It is calculated as follows:

Debt-Equity Ratio = External Debt/Internal Funds

Ideal Ratio:

A ratio of 1:1 is usually considered to be satisfactory. However, there is no rule of thumb or standard norm for all types of businesses. Theoretically, if the owner’s interests are greater than that of the creditors, the financial position is highly solvent.

• A ratio of less than 1:1 means:
o Owner’s equity is more than debt
o The owner is bearing more risk in the business than the external creditors
o The owner has a strong financial interest in the business

• A ratio of more than 1:1 means:
o Owner’s equity is less than debt
o The owner is bearing less risk in the business than the external creditors
o The external creditors have a strong financial interest in the business than the owner

Interpreting Deb-Equity Ratio:

Since the debt-equity ratio indicates the proportionate claims of owners and the outsiders against the firm’s assets, it’s purpose is to get an idea of the cushion available to outsiders on the liquidation of the business.

Often, the interpretation of the ratio depends upon the financial and business policy of the business concern –

• The owners want to do the business with maximum of outsider’s funds in order to take lesser risk of their investment and to increase their earnings by paying a lower fixed rate of interest to outsiders.
• The outsider’s (creditors), on the other hand, want that the owners should invest and risk their share of proportionate investments.

Finally, too much debt can put your business at risk and indicates possible difficulty in meeting interest and principal repayments. While, too little debt may suggest you are not taking advantage of opportunities and realise the full growth potential of your business.

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Article contributed by CA Varun Nirmal

DIRECT TAXES

• DTC rates proposed to be introduced for personal income tax.
• Exemption limit for the general category of individual taxpayers proposed to be enhanced
• From INR 1,80,000 to INR 2,00,000 giving tax relief of INR2,000.
• Upper limit of 20 per cent tax slab proposed to be raised from INR 8 lakh to INR10 lakh.
• Proposal to allow individual tax payers, a deduction of upto INR10,000 for interest from
savings bank accounts.
• Proposal to allow deduction of upto INR 5,000 for preventive health check up.
• Senior citizens not having income from business proposed to be exempted from payment
of advance tax.
• To provide low cost funds to stressed infrastructure sectors, rate of withholding tax on interest payment on ECBs proposed to be reduced from 20 per cent to 5 per cent for 3
years for certain sectors.
• Restriction on Venture Capital Funds to invest only in 9 specified sectors proposed to be removed.
• Proposal to continue to allow repatriation of dividends from foreign subsidiaries of Indian companies at a lower tax rate of 15 per cent upto 31.3.2013.
• Investment link deduction of capital expenditure for certain businesses proposed to be
provided at the enhanced rate of 150 per cent.
• New sectors to be added for the purposes of investment linked deduction.
• Proposal to extend weighted deduction of 200 per cent for R&D expenditure in an inhouse
• Facility for a further period of 5 years beyond March 31, 2012.
• Proposal to provide weighted deduction of 150 per cent on expenditure incurred for
agri-extension services.
• Proposal to extend the sunset date for setting up power sector undertakings by one year
for claiming 100 per cent deduction of profits for 10 years.
• Turnover limit for compulsory tax audit of account and presumptive taxation of SMEs
to be raised from `60 lakhs to `1 crore.
• Exemption from Capital Gains tax on sale of residential property, if sale consideration
is used for subscription in equity of a manufacturing SME for purchase of new plant and
machinery.
• Proposal to provide weighted deduction at 150 per cent of expenditure incurred on skill
development in manufacturing sector.
• Reduction in securities transaction tax by 20 per cent on cash delivery transactions.
• Proposal to extend the levy of Alternate Minimum Tax to all persons, other than
companies, claiming profit linked deductions.
• Proposal to introduce General Anti Avoidance Rule to counter aggressive tax avoidance scheme.
• Measures proposed to deter the generation and use of unaccounted money.
• A net revenue loss of `4,500 crore estimated as a result of Direct Tax proposals.

INDIRECT TAXES

Service Tax

• Service tax confronts challenges of its share being below its potential, complexity
in tax law, and need to bring it closer to Central Excise Law for eventual transition
to GST.
• Overwhelming response to the new concept of taxing services based on negative
list.
• Proposal to tax all services except those in the negative list comprising of 17
heads.
• Exemption from service tax is proposed for some sectors.
• Service tax law to be shorter by nearly 40 per cent.
• Number of alignment made to harmonise Central Excise and Service Tax. A common simplified registration form and a common return comprising of one page are steps in this direction.
• Revision Application Authority and Settlement Commission being introduced in Service Tax for dispute resolution.
• Utilization of input tax credit permitted in number of services to reduce cascading of taxes.
• Place of Supply Rules for determining the location of service to be put in public domain for stakeholders’ comments.
• Study team to examine the possibility of common tax code for Central Excise and Service Tax.
• New scheme announced for simplification of refunds.
• Rules pertaining to point of taxation are being rationalised.
• To maintain a healthy fiscal situation proposal to raise service tax rate from 10 per cent to 12 per cent, with corresponding changes in rates for individual services.
• Proposals from service tax expected to yield additional revenue of `18,660 crore.

Other proposals for Indirect Taxes

• Given the imperative for fiscal correction, standard rate of excise duty to be raised from 10 per cent to 12 per cent, merit rate from 5 per cent to 6 per cent and the lower merit rate from 1 per cent to 2 per cent with few exemptions.
• Excise duty on large cars also proposed to be enhanced.
• No change proposed in the peak rate of customs duty of 10 per cent on non-agricultural goods.
• To stimulate investment relief proposals for specific sectors – especially those under stress.

Agriculture and Related Sectors

• Basic customs duty reduced for certain agricultural equipment and their parts; Full exemption from basic customs duty for import of equipment for expansion or setting up of fertiliser projects upto March 31, 2015.

Infrastructure

• Proposal for full exemption from basic customs duty and a concessional CVD of 1 per cent to steam coal till 31st March, 2014.
• Full exemption from basic duty provided to certain fuels for power generation.

Mining

• Full exemption from basic customs duty to coal mining project imports.
• Basic custom duty proposed to be reduced for machinery and instruments needed for surveying and prospecting for minerals.

Railways

• Basic custom duty proposed to be reduced for equipments required for installation of train protection and warning system and upgradation of track structure for high speed trains.

Roads

• Full exemption from import duty on certain categories of specified equipment needed for road construction, tunnel boring machines and parts of their assembly.

Civil Aviation

• Tax concessions proposed for parts of aircraft and testing equipment for third party maintenance, repair and overhaul of civilian aircraft.

Manufacturing

• Relief proposed to be extended to sectors such as steel, textiles, branded ready made garments, low-cost medical devices, labour-intensive sectors producing items of mass consumption and matches produced by semi-mechanised units.

Health and Nutrition

• Proposal to extend concessional basic customs duty of 5 per cent with full exemption from excise duty/CVD to 6 specified life saving drugs/vaccines.
• Basic customs duty and excise duty reduced on Soya products to address protein deficiency among women and children.
• Basic customs duty and excise duty reduced on Iodine.
• Basic customs duty reduced on Probiotics.

Environment

• Concessions and exemptions proposed for encouraging the consumption of energy-saving devices, plant and equipment needed for solar thermal projects.
• Concession from basic customs duty and special CVD being extended to certain items imported for manufacture for hybrid or electric vehicle and battery packs for such vehicles.
• Proposal to increase basic customs duty on imports of gold and other precious metals.

Additional resource mobilisation

• Proposals to increase excise duty on ‘demerit’ goods such as certain cigarettes, hand-rolled bidis, pan masala, gutkha, chewing tobacco, unmanufactured tobacco and zarda scented tobacco.
• Cess on crude petroleum oil produced in India revised to INR 4,500 per metric tonne.
• Basic customs duty proposed to be enhanced for certain categories of completely built units of large cars/MUVs/SUVs.

Rationalization measures

• Excise duty rationalised for packaged cement, whether manufactured by mini-cement plants or others.
• Levy of excise duty of 1 per cent on branded precious metal jewellery to be extended to include unbranded jewellery. Operations simplified and measures taken to minimise impact on small artisans and goldsmiths.
• Branded Silver jewellery exempted from excise duty.
• Chassis for building of commercial vehicle bodies to be charged excise duty at an ad valorem rate instead of mixed rate.
• Import of foreign-going vessels to be exempted from CVD of 5 per cent retrospectively.
• Duty-free allowances increased for eligible passengers and for children of upto 10 years.
• Proposals relating to Customs and Central excise to result in net revenue gain of INR 27,280 crore.
• Indirect taxes estimated to result in net revenue gain of `45,940 crore.
• Net gain of INR 41,440 crore in the Budget due to various taxation proposals.

Taxation is one of the most important aspects that you need to give considerable time to when starting your own business. Not only is it is legally binding on all business entities, but also, non-adherence to its requirements invoke penalty and revoking of licenses or permits.

Numerous types of taxes come under the ambit of ‘taxation’ in India. However, for the ease of understanding, we will discuss ‘Service Tax’ in greater detail in this article.

What is Service Tax?

Service Tax, a part of the Central Excise Tax in India and a type of indirect tax, is levied on services provided in India. It extends to the whole of India excepting Jammu and Kashmir.

Which services come under the ambit of Service Tax?

Service Tax was first imposed in India in July 1994 for three services. Over the years, it has spread over many more services and now has 125 services in its ambit.

Who has to pay Service Tax?

The liability to pay service tax has been placed on the ‘service provider’

Is there any turnover limit?

The turnover limit, i.e., the aggregate value of taxable service for threshold based exemption is, currently, Rs. 10 lakh in a year.

However, a person availing of this exemption is required to register with the department on achieving a turnover of Rs 9 lakh in a financial year in respect of all taxable services provided by him

What is the rate of Service Tax?

The rate of service tax is 10% on gross value of the taxable service plus 2% Education Cess on the service tax amount and 1% Secondary Higher Education Cess on the service tax amount.

How to Register for Service Tax number?

You have to make an application to the concerned Superintendent of Central Excise in Form ST-1 for registration of your service tax number within 30 days of starting your business. Note the procedure for filing the application:

1. Fill the Form ST-1 in duplicate. (Form ST-1 is available at website www.cbec.gov.in.

2. Enclose:
a. Photocopy of your PAN card,
b. Proof of address of your business to be registered, and
c. Copy of Memorandum of Association or Partnership Deed of the business.

3. Remember, that copy of your PAN card is necessary as a PAN based code (Service Tax Code) is allotted to every business entity.

4. Submit the application form along with the enclosures to the Central Excise office under whose jurisdiction your business falls

5. A single registration is sufficient even when an assessee is providing more than one taxable services. However, he has to mention all the services being provided by him in the application for registration and the field office shall make suitable entries/endorsements in the registration certificate.

When is Service Tax paid?

• In case you have a sole-proprietorship or a partnership firm, service tax is to be paid on a quarterly basis. The due date for payment of service tax is the 5th of the month immediately following the respective quarter (in case of e-payment, by 6th of the month immediately following the respective quarter). For this purpose, quarters are: April to June, July to September, October to December and January to March. However, payment for the last quarter i.e. January to March is required to be made by 31st of March itself.

• In case of any other category of service provider other than proprietorship or partnership, service tax is to be paid on a monthly basis, by the 5th of the following month (in case of e-payment, by 6th of the month immediately following the respective month). However, payment for the month of March is required to be made by 31st of March itself.

Hope this article helps you as you plan to start your own business venture. We would like to get your comments and feedback on it.

Venture Capital in India – a trend that has made its way to our country from the West over the last decade. It involves the providing of capital to a business venture for:

• Seed capital in order to kick-start the business ,
• Early-stage operations of a business,
• Later-stage expansion plans

The main features of venture capital funding are:

• Allocated to high-risk but high potential ventures to float and run its operations till it breaks-even
• Is a very important funding model for start-ups since they do not have access to capital markets.
• The venture capitalist usually makes and recovers the money by owning equity in the company.
• Most venture capital investors seek either an innovative business model or a novel technology to invest in.
• Focus is given to building businesses that would lead the market in both domestic and international spheres

Regulations for Venture Capital:

In India, venture capital funds can be categorized under the following sub-heads:

• Central Govt. controlled development funds by financial institutions like ICICI, IFCI, SIDBI.
• State Govt. controlled development funds by financial institutions of various states
• Public Banks promoted funds like SBI Capital Markets Ltd
• Private Organisations promoted funds like IL&FS.
• Funds by overseas players like Walden International etc

All these venture capital funds are governed by the Securities and Exchange Board of India (SEBI), which is the nodal agency for registration and regulation of both domestic and overseas venture capital funds. The following regulations control all VC funds in this country:

• SEBI (Venture Capital Funds) Regulations 1996
• SEBI (Foreign Venture Capital Investors) Regulations 2000.

Trends in India:

In India, it has been seen that venture capital investments are made into high growth sectors like:

• Technology and the knowledge-based industries (KBI sector).
• Biotech, wireless, IT, pharmaceuticals are some other growing sectors that attract venture capitalists.

Why you should tap this form of funding:

• It will give your business long-term equity finance which will provide a solid capital base for future growth.
• The venture capitalist is like your business partner, sharing both your risks and rewards.
• The venture capitalist will provide practical advice and assistance to you based on past experience with other businesses which were in similar situations.
• The venture capitalist also has a network of contacts in many areas that can add value to your business, such as in recruiting key personnel, providing contacts in markets, introductions to strategic partners, and if needed co-investments with other venture capital firms when additional rounds of financing are required.

 
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Profit & Loss A/C or Balance Sheet? Though both are separate financial reports, they are inter-linked and only collectively reflect a business’s health. Hence, it is important to understand their similarities and their difference.

A Balance Sheet bearing both assets and liabilities is a reflection of past performance as well as a measure of a business’s future capability. On the other hand, a profit and loss statement (P&L), showing earnings, expenses and net profit, throws light on the current state of affairs and indicates where a business is going in the future.

Read together, these two financial statements offer invaluable insights into a business’s performance and potential.

Profit & loss A/C or Income Statement

• It provides information on how a business performed over its accounting period (normally, a financial year).
• It provides detailed view of all income and expenditure of that accounting period, such that comparisons can be made with past performance or budgeted expectations

Balance Sheet

• It shows the extent of your business’s ownership of assets, liability and equity at a given point in time.
• It shows how much cash your business has on hand and also identifies the most valuable assets of the company.
• It helps you to keep a constant eye on the quantum of your debts, and helps you to decide when and how to service them
• Your Balance Sheet will be referred to by all your stakeholders (banks, financiers) in order to gauge your business’s strength and potential

There are several notional elements in a Profit & Loss a/c and the big factor which is not taken into account is movements in working capital. Anyone who has run a business knows that it is one thing to sell an item or a service at a price that produces a profit, but unless customers pay up on time that profit is not secure and is, at worst, an illusion. This simple fact needs to be borne in mind when you look at your P&L a/c. It is, therefore, imperative that you read your Balance Sheet along with the P&L a/c. If you do this, you will know how soon your customers will pay you and therefore give you the power to assess your cash inflows and outflows.

Finally, from an operations point of view, P&L is more important, but from a strategy point of view, Balance Sheet is more valuable. A review of the P&L alone may give the appearance that the company is performing well, while a standalone review of the Balance Sheet can highlight the fact that the company may be in financial trouble.

If you look at one, without reviewing the other, you may get an incorrect financial snapshot. Only by reviewing both the P&L and the Balance Sheet can you truly assess the financial performance and potential of your business.

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One of the compulsory requirements when starting a business is that of opening a Current Bank account. It is ideal for carrying out day-to-day business transactions.

And with more and more banks dishing out attractive features to add customers, businesses are spoilt for choice. Facilities like 24-hour Phone-Banking, Net-Banking, Doorstep-Banking, Instant Alert services, free Demand-Drafts/Pay-Orders are commonplace and almost ‘by default’ these days.

However, there are several other special features and benefits which banks offer that can help you significantly in your regular business activities. All that you have to do is assess your business requirement and then negotiate better terms/features with your banker so that your current account gives you premier service.

We list out some of such features that help a business function seamlessly:

• Payments and Collections through NEFT: National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this scheme, individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the scheme either free or at marginal rates, thus easing business transactions.

• RTGS Collection:RTGS (Real Time Gross Settlement) system facilitates online transfer of high-value funds between bank customers of different banks on real-time basis. Once again, like the NEFTs, RTG could be free or at nominal rates, differing from bank to bank.

• Flexi-Seasonal Benefits: Many banks also offer flexibility to the current accounts for businesses which have changing banking needs during peak seasons. Hence, during peak seasons, there is the benefit of higher transaction limits due to the higher average balances maintained in your account. And during lean seasons, you need not bother about maintaining huge balances to enjoy high transaction limits, which you anyway may not need.

• Manage Foreign Currency:Foreign currency accumulated through business trips abroad or earned through means as approved by the RBI, can be managed by your banker. Many banks offer to:

o Maintains a record of your foreign exchange transactions through monthly statements.

o Give you preferential rates when converting your foreign currency into Indian Rupees.

o Protect you from losing money due to exchange rate fluctuations.

• Special benefits for Exporters and Importers:Banks also offer exporters and importers special banking solutions like — “zero balance” account that enables you to utilize your financial resources more effectively, no commitment of quarterly average balance, free inward remittance, no charges on Foreign Inward Remittance Certificate (FIRC) or Bank Realisation Certificate(BRC) issuance.

With the business environment becoming more and more competitive together with the advances in the field of information technology, a whole world of possibilities have opened up for businesses in India, whether starting or growing. To keep pace with changing times and needs, banks are evolving their offering to their business clients. Your business, therefore, stands to gain. Simply assess your banking needs and call your banker. Chances are that, your bank will have a solution for all your current account requirements.

Every business should do a periodic pulse check through a deep dive of its Profit and Loss or Income statement. This is a vital financial statement that measures the financial performance of the company in any given period.

While many large businesses examine these statements on a monthly basis given the scale and complexity of their operations, a small business should ideally do so at least once a quarter. If you are new to the exercise, here are some pointers on what you should look for in this analysis:

Comparison with the previous year’s numbers: This is a quick and easy check of steady, linear growth. Track your revenues and expenses and compare them to corresponding figures from the previous year. You could even go back one more year to better isolate the trends in your numbers. Ideally, you should see revenues outpacing expenses over the period you are looking at.

Examine your top expense categories closely: Your top expense categories will typically comprise 80% of your costs and those are the items that you need to zero in on. Evaluate how your primary operating expenses – items such as manpower, utilities, travel – are contributing to the bottom line. By estimating what percent of revenue each of these comprise, you will get a quick read on business efficiency.

Drill deeper into anomalies: If you do notice any anomalies in your spending patterns with certain categories, try to get to the bottom of these. If travel costs contributed significantly to your expense structure in a given period, you may want to investigate what caused this. If it is driven by business development, for example, you can choose to view it as an investment that will pay off down the road.

Sundry expenses and petty cash: There are other smaller items that add to your expenses and that you will want to retain control over. To close operational loopholes or prevent instances of pilferage when it comes to things such as supplies and inventory, do a weekly stock take and an inventory reconciliation exercise. A similar approach for petty cash will help you keep a lid on smaller expenses that can add up in the long run.

These checks and analyses tied to revenues, income and profitability are routine in a large company. It requires discipline for a small business operator to get them in place early on, but is well worth the effort.

Of the hundreds of tasks that you need to keep in mind when you step out to start your own business, one of the most important is to open a separate business bank account, called the Current account, with your bank.

Even if you do not anticipate revenues to pick up soon after starting, you need to remember that business banking and personal banking should always be through separate accounts.

The arguments for this are many – take a look and you will be convinced:

• Free and Fair Accounting Records:

With a separate bank account for your business, calculating your total income/revenue in a year will be easy and less-time consuming.

Bank Reconciliations Statements will be easy to draw up thus helping you match the balances of ‘Cash in hand’ and ‘Cash in Bank’.

Separate bank accounts will also help in cross-checking the amount due from your clients. Similarly, you can tell at a glance, how much you owe to your vendors at any given point of time.

• Easy to file IT returns:

IT Returns for individuals having income from a proprietary business or profession,as required by the Income Tax Act of India, need to be submitted in a specified format called the ITR 4. This form requires meticulous details of income and expenditure along with year-end balances of crucial cash and non-cash accounts. In the absence of a separate business account, furnishing accurate information in your IT Returns will be a mammoth task.

• Confident to take statutory audits and checks:

Businesses are often checked by regulatory authorities for proper adherence to laid–down rules and policies, and accurate disclosure of incomes and business activities. In the absence of a separate bank account, a sound audit trail will be difficult to establish thereby exposing your business to the risk of regulatory action.

• Availability of quick loans:

A current account with your bank for your business also means that you enjoy overdraft facilities. Hence, a quick bridge loans is never difficult in case of an existing business relationship with a bank. In cases where a business does not have a separate bank account, working capital loans or loans for expansion or capital investment will be difficult to get.

• Reflects a Professional attitude:

Maintaining a separate business account is an excellent way to give your business more credibility in the eyes of your clients as well as vendors. Both are confident that your business venture is for ‘real’ and not a ‘part-time venture’ or ‘hobby’. This confidence will go a long way in strengthening your business relationships.

Documents needed to open a Current Account: Include —

• Trade License / Value Added Tax / Tax deduction Account Number Certificate / Allotment letter
• Sales tax / Service tax / Tax identification number.
• PAN / PAN intimation letter in the name of the firm
• Address Proof of the business
• Incorporation Certificate
• Proprietorship letter

 
With the environment in the country going pro-business by the day, it is not difficult to open a business account if you have the requisite documents in place. Secure it for your business as you will reap the benefits for years to come.

Even if your business does not come under the income tax net or other regulatory legislations currently, it is a good business practise to maintaining proper books of accounts. The benefits are many:

• Loans from banks for expansion purposes are available only upon showing free and fair accounting records.

• Proper records about sales, customers, suppliers, inventory etc help in getting information promptly.

• Proper financial data and analysis help make effective decision-making, budgeting.

• Accurate and updated records of profit and loss, cash flows, sales, purchases and expenses enable early detection of problems.

• Sound accounting system also serves as an effective internal control.

• Proper records also enhance a business’s competitiveness.

It is therefore imperative that books of accounts are drawn up with accurate information. The following principle can be a guiding light for free and fair recording and reporting:

• Going-Concern Principle: This accounting principle assumes that a business will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future.

• Matching Principle: The matching principle requires that expenses be matched with revenues. For example,salaries to employees are reported as an expense in the month when the employees worked and not in the month when the employees are paid.

• Revenue Recognition Principle: The revenue recognition principle requires that revenuesrecognized as soon as a product has been sold or a service has been performed, regardless of when the money is actually received. This means that while your business would have made sales of say INR 5 lakhs in a month, you could have realise only INR 1 lakh in that month.

• Materiality Principle: This principle requires the business to record only those expenditures/incomes which are significant in nature. Also, an asset that is of very low value can be written off in the very first year instead of apportioning over its useful life. Because of materiality, financial statements usually show amounts rounded to the nearest rupee, to the nearest thousand, or to the nearest lakhs depending on the size of the business.

• Conservative Principle: The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains.If a situation arises where there are two acceptable alternatives for reporting an item, conservatism principle directs the business to choose the alternative that will result in less net income and/or less asset amount.

We all know how the founder of a high-profile IT company fell after cooking up his company’s Books of Accounts, and has been subsequently charged for cheating, embezzlement and insider trading.

Years of dedication to build a world class company came to naught, destroying the faith of many — employees, stakeholders and countrymen. No one benefited in the aftermath. Stringent laws, checks, regulations were imposed. The entire industry, country was eyed with cynicism.

Laws-makers have put down strict regulations to ensure that businesses do not falsify their records.

The Income Tax Act of India warns:

“(a) Where any person has in his possession or control any books of account or other document relevant to any proceedings under this Act containing any false entry or statement; or

(b) Where any person makes or causes to be made any false entry or statement in such books of account or other documents; or

(c) Where any person willfully omits or causes to be omitted any relevant entry or statement in such books of accounts or other documents; or

he is punishable with rigorous imprisonment for a term which cannot be less than three months but which may extend to three year. The trial court at its discretion may also order a fine.”

And as per the Companies Act, 1956, “Every company is statutorily required to ensure that the company has not falsified its books of accounts or the company’s funds have not been misappropriated or the management has not misused its fiduciary position for any personal advantage”. Default in this regard is a punishable offence.

Which all records are called Books of Account:

• Professionals:

   

  If engaged in Legal, Medical, Architectural, Engineering, Accountancy, Technical consultancy, Interior decoration, Authorized representative, Film artist, etc, books of accounts and documents can be:

• Cash book

• Journal, if the accounts are maintained as per mercantile system of accounting

• Ledger

• Photocopies of bills, serially numbered and photo copies or counterfoils of receipts issued in respect of sums exceeding Rs 25,

• Original bills for expenses exceeding Rs. 50 and payment vouchers for petty expenses. However in a case where the cash book maintained by the person contains adequate particulars in respect of the expenditure incurred, then vouchers are not necessary in respect of expenses upto Rs 50.

• Company:

   

  Books of accounts for a company include records of:

• All sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place

• All sales and purchases of goods by the company

• The assets and liabilities of the company ; and

• In the case of a company engaged in production, processing, manufacturing or mining activities, particulars relating to utilisation of material or labour or to other items of cost as may be prescribed.

• Limited Liability Partnership:

   

  The books of account shall contain:

• Particulars of all sums of money received and expended by the limited liability partnership and the matters in respect of which the receipt and expenditure takes place;

• Record of the assets and liabilities of the limited liability partnership

• Statements of cost of goods purchased, inventories, work-in- progress, finished goods and cost of goods sold; and

• Any other particulars which the partners may decide.

Honesty and fairness in maintaining business records is one of the pre-requisite for a business’s success and longevity. Also, it earns the admiration and adulation of many. Infosys’s self- Corporate Governance, being a leading example.

A common problem for small businesses across all industries, verticals is that of getting paid on time. And most often than not, one finds business owners worrying about how to get their dues collected from their clients. Constant reminders, repeated follow-ups with the accounts departments, can leave one running around in a maze and frustrated. Resulting in a colossal waste of time and resources.

While you may not want to deal with your precious clients with a heavy hand, it is important to have certain rules in place with regard to ensuring payments from your clients. Let’s take them one by one:

• Know your customers: This does not apply to over-the-counter-payment business models where a client is bound to pay immediately upon receipt of services – eg, retail, beauty salons, online portals etc. Instead, this applies to businesses like small agencies — advertising and media agencies, video makers, event management unit etc where payment is upon raising invoices after a stipulated period. In such cases, it is important that you do a back-ground check on the prospective client. Also, you may try to take references before taking on new clients.

• Manage your invoices:

• Try to raise invoices immediately upon completion of work or silos of work. Do not wait for the month to end

• In cases where vendor registration takes long and you have to wait for the stipulated time, make sure that you have the paperwork ready so that you do not waste time once the window to submit invoices opens

• Try to have a clause of discount upon on-time payment – this will save you the trouble of continuous follow-ups and phone calls. Accordingly, have a clause of penalty for late payment in your contract in order to discourage your clients from paying late.

• You may also include a clause for advance payment/deposit while drawing up the terms of agreement

• Make sure you have various forms of contact information, and that the customer has yours

Also remember that it is a good business practise to:

• Ensure that you know the cut-off date for invoice payment
• Break down the project into small, billable chunks
• Ensure that your billing calculations are correct
• Ensure that the invoice you send is not editable by your client (use a PDF if sending via email)
• Ensure that you know the right people for payment follow up, especially if you are dealing with a large company
• Ensure that your records/accounts are accurate and up-to-date

Ensuring cash keeps flowing in to your business is important as it will help you take a number of decisions and embark on new strategies. Hence, it is imperative that you get paid by your clients. And on time.

Increased demand makes it imperative for you to scale up your operations. And as you contemplate taking a business loan from a local bank,take a quick look at all the dynamics involved:

Purpose:

Most banks give loans to small and medium businesses for the following reasons:

• Working capital requirements
• Acquisition of land and building
• Building construction/up-gradation or renovation of offices, showroom
• Substitution of high cost debt
• Computerization expenditure

Eligibility:

• Business Entity:Businesses organised as sole proprietorship, partnership or Private Limited Company
• Profitability: The business should be well established and should have a proven record of profitability. A number of banks agree to loans only when the business can show that it has earned pre-tax profits in each of the immediately preceding 3 years
• Exiting Loan Records:Track record of existing loans should show a positive picture, with all repayments being made on time. This works to the advantage of the person seeking the loan.
• Existing Relationship: Most banks prefer that the business has an existing relationship with them so that they can vouch for the businesses repaying capability

Documents required:

An indicative list comprises –
• Latest sales tax/VAT/service tax return
• Latest income tax return
• Bank statement
• Certificate of registration
• Proof of ownership: Title Deed, Municipal Tax/Municipal Charge Bill / Receipt, Property Tax Paid Bill
• Residence Proof: Telephone Bill/Electricity Bill Driving License/Valid Passport
• Identity proof: Driving License, Passport, Pan card

Loan Amount:

• While this differs from bank to bank, on an average, there’s often a minimum cap of Rs.25,000 and a maximum of Rs 1 crore for such loans.

Tenure of Loan:

• This too differs from bank to bank – while most banks have an average tenure of 3 to 5 years, the same can be re-negotiated in case the business owner has been the bank’s client for long.
• Repayment too can vary from being monthly or quarterly installments as per the normal cash generation cycle.

Collateral security:

• Consists of tangible security, such as immovable property, bank deposits, NSC, RBI relief bonds etc to the extent of a minimum of 100% of the limits sanctioned.
• Personal guarantees of proprietor/partners/promoters are also invariably obtained.

A good business practice is to make a comprehensive study of all banks in the city and assess which bank gives the best loans with minimum interest and repayment benefits.

Also, with an array of loans and schemes that are available and with banks going all out to woo clients, good businesses enjoy an edge, a commanding position – a business owner can use his negotiating skills to get a good deal from the bank for his loan.

Starting, running a business is not for the chicken-hearted!! After all, it takes a strong heart and mind to wade through difficult situations, take difficult decisions. A case in point being the decision to borrow funds –as, in case of small start-ups, bank/institutional credit may be difficult in the absence of proven track record. In many such cases, people turn to their family or friends for their funding requirements.

But before you decide to borrow from family or friends, but be sure to look at the pros and cons.

Advantages of Borrowing from Family/Friends:

•    Lower Interest Rates: One of the biggest advantages of borrowing money from family is that you are likely to pay a lower interest rate than you could get at a bank or credit union.

•    Absence of red tape:  Bank/institutional loans’ documentation requirements can leave you baffled and frustrated. Since you are just starting off, you might want to stay away from such time, effort consuming processes. Loans from family/friends are often a savior in this regard, as they are less likely to scrutinize your business plan with a fine-toothed comb.

•    More Flexible Repayment Terms:  Often, with family/friends, you get favorable repayment terms for your new business loans. For instance, you might be able to write a loan in which the repayment does not begin for six months to a year down the road. This gives you time to get your new venture off the ground without worrying about servicing the debt right away.

•    Established Relationship: Family/friends, whose trust you enjoy, are more likely to have faith in your business idea. However, it is always a good practise to show them a structured business plan so that your close family/friends do not feel that they are being taken for a ride.

Dis-advantages of Borrowing from Family/Friends:

•    Unsolicited advice: By lending you money, your relation/friend may feel that he or she is now part owner of the company, with a right to call the shots and make business decisions. Deal with any such form of meddling by making it clear that this is strictly a financial decision, and that you will be the one in charge of the day-to-day operations of the business.

•    Lack of Clarity: Treating loans from family/friends as informal transactions is a business hazard and can lead to complications and souring of relationships. Avoid this by documenting the loan including interest rate, repayment terms etc. The person lending you money should also read the document carefully and have his lawyer vouch it, before agreeing to the terms.

•     Complicating Relationships: This being the biggest drawback of taking money from your family/friend, most people shy away from taking loans from family/friends. Consider and identify the risk before taking out the loan — make contingency plans for paying back the money early if need be.

Formalizing a Loan Agreement:

It is always a good idea to formalize your loan even if you have borrowed the money from your grandma or best friend!!! Consider the following

•    Decide whether the investment be equity or a loan. If the money is treated as equity, your friend or family member will own part of your business. If it is a loan, you will repay it within a set period of time, including interest.

•    Mutually agree on:

A reasonable interest rate on the loan.
An acceptable time-frame for the loan repayment.
Possible penalties for not paying on time or defaulting.

Both your business and your relationships are important. Do make sure that money matters do no spoil it. Venture with care.

In the first part of this article, we told you about budget, its importance in your business and how often you should create it. In the second part, we will guide you on how to create a budget and how you should refer to it.

CREATE a Budget

Follow these basic steps on a regular basis and you will find that budgeting is not all that difficult at all –

First Budget:

•The first budget is always based on average forecasts.

•Identify all types of expenditure that you expect for your business, both capital and recurring in nature – for e.g. raw materials, rent, salaries, utility payments, equipment, furniture, etc.

•Identify the sources from which funds will be available – funding, revenue, income from investments etc.

•For businesses who are about to start or have just taken off, sales trends in similar businesses should be analysed in order to arrive at a realistic revenue figure.

On-going Budget:

•Review the assumptions about the enterprise’s business environment that were used as the basis for the last budget, and update as necessary.

•Make realistic forecasts of revenue, income from other sources and outside funding for the budget-period

•Similarly, make realistic forecasts of associated costs, payments expected during the period

WHAT YOU SHOULD DO with your budget:

Foremost, do not put your budget aside after creating it. Remember that it should serve as a ready-reckoner and a speed-breaker for you in the daily course of your business activities. Here’s what you should refer to in that precious document -

• Compare the forecasted numbers with actual ones to find out if there have been favourable or unfavourable variations.

• Look for reasons of wide variations between forecasts and actuals, and point out if any of your assumptions was lacking. Use this information to improve your business and create a more accurate budget for the next period.

• Find out if any slags can be plugged — check for ways for ensuring cost efficiency, see if your debtors are paying you on time.

Remember, the budgeting exercise and the budget should be taken seriously in order to ensure the smooth running of the enterprise. However, also remember that, sometimes you will have to deviate from your budget owing to urgent business needs. But the deviations should be only in the best interest of the business.