How can financial transformation help start-ups grow?

The eMSME has been a key observant in the MSME space for the last few years, thanks to its domain experts. eMSME believes that operating with limited resources and a lean team is typical in the start-up space. As an eMSME, if every entrepreneur is thoughtful and has abundant resources, a CFO or controller can be hired, or the financing operations can be outsourced to the accountant. However, finance is no longer relegated to the back office, owing to its demand in crucial years of business.

The fact is that the finance department performs or is expected to perform the heavy lifting that drives digitalization and enables greater business resiliency throughout its business existence. The traditional management of finance requires resources and is less efficient to deal with challenges in stages of the business life-cycle. Transforming the process of managing finance through technology usage can help increase efficiency for start-ups by reducing the cost of management and limited resources. Fortunately, pandemic and technological advancement has been driving the speed towards such adaptation.

Several start-ups aspire to operate at the level of large enterprises by using technology and technology-enabled solutions. This gives them a competitive edge with a smaller team size, becoming an advantage with a reduced cost. The pressure is to evaluate potential technology solutions that optimize operations for growth and scale with the limited resources available.

However, a start-up might access legacy technology or a mature finance tech stack. Instead, the finance team must make strategic choices about digital finance solutions that can help streamline manual processes, gain visibility into critical financial data, maintain employee satisfaction without increasing headcount and offer the most return on investment. This means taking a “novel” approach to finance by investing in complete and holistic digital transformation, allowing one to embrace change and strategize how to encourage business growth best.

Preparing for digital transformation of finance

Start-ups cannot err during preparation for digital transformation. They need to take precise steps to ensure a smooth transition and set the team up for success. The following areas are often the best places to start:

Strategic cash flows

eMSME feels that managing cash flow is one of the most common problems that small businesses (especially the early-stage ones) face daily. It is more due to the difficult choices they may have to make using limited resources between the business’s short-term and medium-term requirements. The reasons for this can range from difficulties in streamlining internal processes to challenges in forecasting and reporting. It can even have something to do with issues during negotiations with suppliers or vendors.

eMSME suggests that simple practices like sending invoices as soon as possible, keeping track of payments to be made, filing and paying GST at the right times, and managing TDS deductions and payments help optimize the resources. From there, companies can evaluate operations to see where to cut expenses and look for ways to adjust their inventory for cost efficiency. Fortunately, fintech platforms can be used to manage these cash flows strategically.

Schedule regular financial forecasts to gauge profitability

Financial forecasting has long been used as a management tool to estimate profitability based on past and present financial data. It gives an idea of when operations should be cash-positive and allows to allocate budget for the future. But, the practice can also be critical for short-term and long-term scenario planning, helping to determine how different conditions or decisions might impact revenue growth or cash flow. This allows leadership to take immediate action or mitigate risk, should conditions take a turn.

It’s like arriving at best-case and worst-case scenarios for future outcomes. To do financial forecasting and scenario planning properly, eMSME advises ensuring up-to-date financial data and employing the practice monthly, quarterly, or after changes in inventory, operations, or business plans. Fortunately, technology platforms also help in managing this efficiently.

Invest in the right technology

Automation has become the need of the hour to support business growth, become economical and adhere to corporate governance compliance. Automation is the secret weapon for all start-ups. Automation finance solutions have made manual processes so much more efficient that they’ve exponentially increased the importance of an organization’s finance tech stack.

eMSME states that a start-up should begin by identifying the most time-consuming manual processes (e.g., accounts payable, procurement, and so on) and then look for digital finance partners that can automate these tasks and offer built-in controls to ensure security, governance, and compliance to the law. Going this route provides remote management options while still allowing opportunities to streamline and optimize operations for scale and cut costs throughout the process.

Modernizing financial management for start-ups isn’t a complex process. It primarily demands the team’s dedication to being on the right track. Moreover, companies should review the current cash flow management practices and conduct regular financial forecasts, turning to reliable automation solutions. With a solid foundation, a company should be ready to compete (both large and small) in the market.

-- Praveen Subramanya, Co-founder, AJVA Fintech.