How To Do Allocation Of Funds In Financial Management?
Table of Contents:
2. Purpose Of Allocation Of Funds In Business
FAQs On Allocation Of Funds In Business
1. How To Allocate Funds?
Fund allocation is the most significant part of running a business. Every successful entrepreneur worth his salt pays emphasis on allocating funds more than the sales figures. It is important to learn about managing finance before you embark upon their journey of entrepreneurship. However, it is largely the most challenging part of the business and as per industry experts, 42% of business owners find it difficult to manage the cash flow. And precisely, that is the reason why businesses fail.
Business finance is an area of specialisation in itself and it is difficult to sum it up within just one article. However, everyone needs a starting point in their endeavour to acquire complete knowledge. This article brings to you some significant aspects of fund allocation and management that will help you to embark upon the journey to master the financial management of your business.
2. Purpose Of Allocation Of Funds In Business
According to industry experts, the primary objective behind fund allocation is to make sure that the business operations can be carried out without any hindrances. Further, a disciplined asset allocation practice helps the business to build a credible value per share of the company in the stock market.
Here are 5 rules of thumb to get the fund allocation of your business right:-
(A) Understanding the Worth of Net Profit
A business needs funds to start, grow and sustain. But how a business owner uses the fund from the very first day of starting his business decides the ultimate fate of the business. However, if you want to learn to deploy the best fund allocation practices in your business, you need to learn to segregate your income into three significant categories.
The in-coming cash flow can be divided into three segment –
- Top-line – It refers to the turnover or the sales figure for a particular financial quarter or year.
- Expense – It refers to the expenditure incurred by the business owner in paying the salaries, investing in equipment, infrastructure, IT, travelling costs, staff training, etc. The increase in the top line also increases the expenses of the company.
- Bottom-line - It refers to the amount that is left after deducting the expenses from the sales.
The first step towards understanding the finances of your business is to understand profit. A lot of business owners mistake their income to be their profit. Whereas, the amount you get after deducting the expense and the tax from your income is profit.
It is significant to understand and segregate the profit amount from your expenses because it is this amount that reflects your actual income. The balance amount from your turnover is reinvested in your business to expand and sustain your business.
Successful business owners have a habit of checking the financial statement of their business regularly.
(B) Contingency Fund
The year gone by has taught us the hard way that with money or with no money, the show must go on. And, today as we inch closer to the end of the most difficult financial year our generation has ever seen, we can say what an incredibly uphill task it is to sustain a business without money. Here are a few words of wisdom for business owners that would help them to grow a contingency fund for their business.
Money flows into an organisation, but it flows out at a more rapid speed. You can control it only if you plan ahead of time. And for that, you have to be well informed. Every business owner has to ace in financial management. Business is all about managing your finances efficiently. The financial challenges start from the moment you decide to start the business. First, it’s about seed capital, then it is the running capital. This could further lead to debts if not managed properly. Hence, the only way out is to keep learning about tax structuring, investment, and other financial skills.
(C) Investing in the Manpower
A business is not just about the product or service you sell and who you sell this service to. The people who help you create the deliverables and serve your customers are also equally significant. Hence, a part of your fund allocation goes into investing in the manpower for your business. This includes wages as well as staff training.
When it comes to wages, the amount you pay should compensate for the service they offer and it should adhere to the industry standards. There is a minimum pay scale determined for every professional level as per the skill, qualification, and level of experience they have.
Just like the machinery and technologies needs to be upgraded from time to time, even staff training help to upgrade the skills and motivation level of your employees. This is as much a part of your fund allocation for the manpower as wages.
(D) Budgeting
The very fundamentals of an efficient fund allocation lie in good budgeting. Budgeting involves estimating and organising the income and expenditure of your business. You need to have a strong and stable budgeting module that would eventually help you build a profound financial architecture.
- Experts suggest that the financial manager should focus on the cash flow and try to estimate future expenses. He should ideally emphasise increasing the avenues of income and reduce the expenditure as much as possible.
- A regular and disciplined practice of bookkeeping, estimating the tax, paying the bills on time helps to keep the budget under control. Ideally, the account should be checked intermittently on a daily, weekly, fortnightly, quarterly and annual basis.
- Practice journaling minute details of each financial transaction. Financial management skills develop with time and a disciplined approach. Detailing out each transaction automatically reduces unnecessary expenses to a large extent. Also, take into account the advance payments you have made to the vendors. And as you record your expenses, also analyse whether you could have reduced the outflow of the cash in any way.
- While creating the budget, keep the tax liabilities in mind. Learn about the various taxes that you have to pay and plan accordingly. Take advice from a Tax Consultant so that you don’t get overburdened at the time of filing tax.
Arrange internal and external audits to make sure that the budgeting practices that you have put in place are working properly. Financial audits will also reveal the points of unnecessary cash drainage and help you to take measures to curb them. Trim your expenses as much as possible. Automate the business processes wherever it is possible, get rid of redundant and depreciating assets, and invest in the areas that have the potential to grow.
(E) Invest in Knowledge and Skill Development Activities
Your fund allocation policy must and should have a budget for skill development for yourself as well as your employees. Why? The world around us is evolving at an incredible pace. So many products that used to be a part of our life even five to ten years back have become obsolete at present. Hence, by upskilling yourself and your team, you are only preparing yourself to meet the ever-growing demands of the market.
Besides, it is very efficient aspiration management for your employees. An organisation that only output, punctuality of reporting time, salary, etc., will have its employees whimpering over the salary all the time. Providing learning platforms and team-building activities will have your employees look forward to personal and professional growth as well. This will also help to build their loyalty towards the company.
3. Cash Allocation Process
As mentioned at the beginning of the article. Managing the finances of a business requires a proper understanding of the subject. That is the reason why the Finance Head of an organisation is the highest-paid employee. The objective should always be to have a surplus rather than a deficit while closing your accounts at the financial year-end.
On that note, I wish a very successful financial year ahead to the reader. I hope this article helps you to reassess and deploy a sound financial framework for your business.
Also read:
1) How To Get Small Business Loan From Government?
2) What is a business loan? How to apply for a business loan?
3) 7 Different Types of Loans for Your Small Business
4) Are small business loans secured or unsecured?
5) OkCredit: Simple, Paperless & Secure solution for businesses
FAQs On Allocation Of Funds In Business
Q. What is the need for a financial advisor?
Ans. Unfortunately, managing finance is a skill that we have not been taught in our school. Only a few people who pursue Commerce in their higher studies have in-depth knowledge about this. A lot of start-ups fail despite having the best business ideas because they can manage their finances properly. Hence, it is wise to hire a good financial advisor who might charge you a fee but they will make sure that you achieve your business growth without any financial hurdle.
Q. What is the best way to keep track of the expenses?
Ans. Start by opening a separate bank account and a credit card for your business. Store the receipts of your purchases properly and also keep a written record of the same. These days, there are several digital applications available to keep track of your expenses. You can use them to record as well as analyse your expenses.
Q. How to minimise my tax liabilities?
Ans. Paying tax is a duty of every citizen. And it should be done with a lot of pride. The tax we pay is our only opportunity to contribute to the growth of the nation. However, at the same time, there are several tax-saving schemes, financial measures, and planning that can help you to discharge this duty efficiently. You could start reading about the several tax liabilities that you will have to adhere to as a business owner or hire a tax advisor who can guide you through the process.