By Deepak Ghadge
Ease of Doing Business for MSMEs: Profitability is in the mindset first, and then it reflects in the implementation.
One key reason why many start-ups or SMEs fail is because for them profit is last to checkbox and not first. It is crucial to shift the mindset to a ‘profit-first’ mindset. Let’s look at a few steps here for this transition.
Every entrepreneur tries to take their salary last. This mindset has to change. Plan your business model and revenue streams so that if you are a CEO/Founder/Co-Founders take your salary first. This completely shifts the mind to look at generating revenue and reducing unwanted costs.
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Let’s look at this example from two different angles.
|Conventional Approach||Profit First Approach|
|Income 100,000||Income 100,000|
|Rent 25,000||Profit 10,000|
|Salaries 30,000||Rent 25,000|
|Taxes 10,000||Salaries 30,000|
|Marketing 25,000||Taxes 10,000|
|Miscellaneous 25,000||Miscellaneous 5,000|
|Profit/Loss -15000||Marketing 20,000|
When you take the Profit First approach, you can control your expenses. Like in this case, profit is taken out first before spending on miscellaneous and marketing expenses. Marketing is the critical part of the activity, but you can control unplanned and unnecessary marketing investments. Once the budget is dedicated, the founders will start looking at the right marketing platform, target audience, and greater ROI on each investment for your business activity.
Another key aspect is to have multiple current accounts in the bank instead of having one current account which inculcates the habit of financial discipline.
Most SME owners today have only one current account or two current accounts. I would suggest that each SME owner should have five additional current accounts for managing activities that form a substantial part of the operating expenses such as rent, salaries, taxes, profit, reserves and research. Once the revenues from sales transfer are received, the funds can be transferred to the relevant current account. Allocations to the tax account, salaries, profit, and rent are transferred to their respective current account. This gives a clear picture of what are your controllables. Two things will be evident to the business owner, they will have a clear picture whether to increase your sales or reduce the expenses.
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In the conventional method of managing accounts, entrepreneurs or owners have only one current account for their business. From this one current account all income and expenses are managed. If there is no supervision, multiple approvals, consensus, or discipline the entrepreneurs spend without realizing that there are fixed costs such as rent, salaries, or taxes that will have to be paid. They risk using this money, which is required for future payments, in expectation that something will work out. However, when the deadline appears, there is no money or not enough money to cover these costs. This puts the entity at risk. With multiple accounts, processes and a discipline are built and fund allocation is easy. However, it is also important to not withdraw from the accounts for any other purposes other than what it is intended to. In fact, the reserves and profit current accounts should have multiple approvals to ensure that the funds are used as per the initial intention.
Every entrepreneur starts a business to make profits so it is critical to think ‘profit first’. By taking profit first approach you are fundamentally changing the way you run your business. Are you ready to change your game?
Deepak Ghadge is the author of the book ‘Dhool Dhoop Dhakka: Entrepreneurship by Design’.
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