Flexi CFO Services: Boon For Startups, MSME and Emerging Businesses

                    Flexi CFO a boon to MSME / Startups/ Emerging businesses

 

In the initial phases of a startup or business, the primary attention is given to business/market development, while crucial aspects like compliance, internal control, financial control, etc. are often neglected.

In numerous instances, this becomes the primary cause for startup failure or business closure, despite a highly favorable economic environment.

For example not properly managing cash flow can cause severe liquidity crisis leading  to closure of business. Likewise, if the working capital is not managed properly it can lead to funds crisis further leading to severe problems for the businesses. Therefore, it is important to lay strong foundation of robust accounting, financial, commercial systems in the organizations.

 The chances of occurring above issues are less where the promoters are financial literate. Where the promoters are not financially literate, which happens in most of the cases, such bottlenecks are very common.

Lack of financial literacy and resultant problematic scenario discussed above could further worsen the situation. It can spoil the relation with bankers as there could be irregular repayment of financial obligations leading to risk of account being declared as NPA. (non- performing asset). The criteria used by banks to disclose accounts with certain repayment pattern. A bank would declare their customer who they have lent money as NPA where even the interest is not received from the customer/ borrower in the last 90 days)

Where the books of accounts compiled do not have certain features or certain strengths, they may not be inclined to continue their lending or may not consider them for lending purposes at the first instance itself. For Example, inadequate routing of cash flows from the designated account, Inadequate debt equity ratio, Inadequate current ratio, inadequate promoters margin in working capital assessment, long term solvency, ROI etc.

One of the easiest option to avoid above described situation is to take the services of some financial expert. But as all good things comes at a price, so is the services of a financial expert. Typically a financial professional with 10 to 15 years of experience would cost anywhere between 30 lacs to 50 lacs per annum. The revenue stream of a MSME or startup during the initial stages could not sustain such costs. Therefore, it’s a catch 22 situation.

The services of a flexi CFO provides solution here. A flexi CFO is a finance expert with years of diversified experience who make their services available on need basis. The cost of a flexi CFO is variable and not fixed, and therefore, provide flexibility to the small businesses. Usually, the services of a flexi CFO is taken for short duration such as 3 months, 6 months etc or once/ twice in a week or fortnight or month.

Following are the advantages of hiring the services of a flexi CFO:

1.     Benefit of years’ of experience.

2.     Optimized Cost of services.

3.     Robust foundation of accounting, financial, commercial systems, well defined

 work flow.

4.     Better Cash flow management & better liquidity in the business.

5.     Clarity =>Better Decisions=> cost savings and economies.

6.     Efficient decision making.

7.     Better relations and negotiations with banks.

How the services of a Flexi CFO are useful to MSME or a Startup:

1.     With a Flexi CFO comes not only the years of curated experience, but also a network of investors, banks, consultant, advocates, reach in Government departments, access to markets, contacts with vendors etc. The businesses can take advantage of the same.

2.     In setting up robust system of accounting, Supply Chain Management (SCM), Inventory Control system, commercial management and working capital management system

3.     Setting up of a good MIS system that help day to day decision making.

4.     Timely Compliance of various laws and regulations

5.     Books of accounts and records that are in compliance of various statues.

6.     Books of Accounts that comply the requirement of banks

7.     Professional advice in strategic matters.

8.     Setting up of a judicious capital gearing.

9.     Optimum cost of capital.

10.  Helps funds mobilization.

 

Conclusion:

The concept of a flexi CFO due to its inherent merits is being widely accepted by the Startups and Small and Emerging Businesses. On the one hand the services are lighter on the pockets and on the other hand the befits are immense.

 

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Cost Control an effective tool for better management

                                

 

Cost Control and Cost Reduction

 

Cost Control is a process in which we focus on controlling the total cost through competitive analysis. It ensures that the cost incurred on a business process should not go beyond the pre-determined cost. Cost Control involves a chain of various activities, which starts with the preparation of the budget in relation to production. Thereafter we evaluate the actual performance. After that we compute the variances between the actual cost and the budgeted cost and further, we find out the reasons for the same. Finally, we implement the necessary actions for correcting discrepancies.

Advantages of Cost Control:

 i) Cost control helps to achieve expected return on the capital invested in a company, by resolving deviations between actual and expected standards. ii) Cost control leads to improved standards of production with the limited resources of the company. 

iii) Cost control reduces the prices or tries to maintain them by reducing the cost.

 iv) Cost control leads to the economic use of resources. 

v) It increases the profitability and competitive position of a company. 

vi) It enhances credit worthiness of the company.

vii) It prospers and increases the economic stability of the industry. 

viii) It increases the sales of the company and maintains the level of employment. 

Disadvantages of Cost Control:

 i) It reduces the flexibility and process improvement in a company. 

ii) It restricts innovation by emphasizing to reaching the preset standards 

iii) It requires skilled personnel to set standards. 

iv) It lacks creativity as it is concerned with following the current standards. 

v) It does not lead to improvement in standards.

 

Steps Involved in implementing cost control in an organization:

 

1.   Plan your budget: The first step is to plan your budget for each business activity. Define standards for your business activity for which a cost control program is intended to be implemented.

2.   Monitor all expenses: Once the budget has been planned/standard defined, all expenses need to be monitored regularly.

3.   Use change control systems: Change control systems should be used to manage any changes that occur during the project.

4.   Manage your time: Time management is crucial for effective cost control. With the passage of time even otherwise also cost tend to increase.

5.   Track earned value: Earned value is the value of work completed compared to the planned value.

6.   Costs should be analyzed as the cost incurred, cost to be incurred vis a vis earned value.

7.   Estimate the overall cost of resources needed for the work: The overall cost of resources needed for the work should be estimated.

8.   Allocate the budget to each task: The budget should be allocated to each task.

9.   Measure differences from baseline budget: Differences from the baseline budget should be measured regularly.

10 Forecast final costs: Final costs should be forecasted based on the progress made so far.

 

11.  Determine the causes of cost overruns: Causes of cost overruns should be determined so that corrective action can be taken. The process shall also help in reviewing the standards and also setting standards in the future.

Techniques of Cost Control:

 

1. Budgetary control: The budgetary control is the process of continuous comparison. It works with creating budgets and continuous comparison of these budgets with the actual. It is finding the reasons for deviations and revising the budgets with needs. It helps in planning coordination and controlling. 

 

2. Standard costing: Standard costing is setting a standard cost and using this standard cost with actual and analyze the variances. It helps in identifying the causes of variances and cost estimation. 

 

3. Inventory control: Inventory control is regulating the purchase, and usage of materials to maintain production without blocking the extra funds into it. It tries to reduce the wastage of the material and leads to effective utilization of it. 

4. Ratio analysis: Ratio analysis identifies the relationship among different variables. It helps to identify the trends in an organization. Ratio analysis is also used for the comparison of different organizations on different aspects. It is mainly used for comparing performance with other organizations and external standards.

5. Variance analysis: Variance analysis is a method of cost control. It involves the identification of the amount of variance and to analyze the reasons for these variances. A variance is which varies from the standards set. It can be favorable or unfavorable.

 Is the Cost Control and Cost Reduction are the same? Difference between Cost Control and Cost reduction:

 

Cost control and cost reduction are two different concepts. Cost control is the process of managing costs to ensure that they do not exceed the budgeted amount. It involves identifying and analyzing the costs of various business activities and then taking steps to measure, compare & then reduce them. Cost reduction, on the other hand, is the process of reducing costs to improve profitability. It involves identifying and eliminating unnecessary costs without affecting the quality of the product or service.

 

BASIS	COST CONTROl	COST REDUCTION
Steps involved	Cost Control process involves defining the standards, measuring actual performance, comparing actuals with standards, estimating variances and taking corrective actions.	Cost Reduction is critical analysis of existing standards to improve the standards rather than creating the standards.
Techniques	Cost Control uses techniques like budgetary control and standard costing	Cost Reduction uses tools like simplification, standardization, value engineering, ABC analysis, etc.
Focus	Cost Control focuses on maintaining the standards and achieving the established standards	Cost Reduction is challenging all the predefined standards and brings cost down further.

  

Time period	Cost Control is not a dynamic function; it tries to reach to the minimum cost at a given point of time	Cost Reduction is a continuous process. It is not a period based concept but it analyses new ways to reduce cost.
Orientation	Cost Control is focused on the past and present cost data.	Cost Reduction is a future oriented concept.
Nature	Cost Control can be regarded as a preventive function as it attempts to maintain the cost at the required pre-set standards	Cost Reduction is a corrective measure. It tries to improve the efficiency of the existing control mechanism. It assumes that there is always scope of reduction.
Permanency	Cost Control is temporary in nature. It is just a measure to reduce variances between actual and budgeted.	Cost Reduction is permanent reduction in cost of a good or a service
Cost concerned	Cost Control focuses on reducing the overall cost.	Cost Reduction is an attempt to reduce the per unit cost
Quality concerns	Cost Control does not talk of quality of the product; it focusses on reduction only.	Cost Reduction is reducing the cost whole maintain the quality of the product.
Frequency	Cost Control is more of a routine activity. It requires close monitoring.	Cost Reduction is research oriented; it is a form of improvement so it demands creativity.

How to measure the effectiveness of control

 

To measure the effectiveness of your cost control measures, you can use a cost-effectiveness analysis. This involves measuring the outcome of the activities or interventions you are comparing and calculating the costs of those activities or interventions. You can then divide the costs by the outcome to get the cost-effectiveness ratio. This ratio indicates how much it costs to achieve one unit of outcome. The lower the ratio, the more cost-effective the activity or intervention is1.

 

Example of Cost Control:

·        Renegotiating contracts with more favorable terms

·        Getting more competitive bids from different vendors

·        Improving product quality to reduce rework and scrap

·        Reducing the number of items carried in inventory

·        Reducing employee expenses with better expense management 

·        Accounts payable outsourcing

·        Increasing efficiency with automation software 

·        Taking early payment discounts on accounts payable

 

control and cost reduction?

 

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