Micro, Small and Medium Enterprises (MSMEs) form the backbone of the national economy, creating jobs and contributing to sustainable economic growth. However, one of the biggest challenges faced by many MSMEs is effective financial management. Yes, despite the important role MSMEs play in the Indonesian economy, financial management of MSME businesses is not easy. Based on the results of a study by Forbes, there are 8 out of 10 MSME players who experience failure in the second year. MSME players were also very depressed during the Covid-19 pandemic. The Ministry of Finance said that MSMEs were 1 of the 4 sectors that were most pressured by the pandemic. This sector is under pressure due to disruption in cash flow and a decline in sales, which has an impact on the ability of business owners to fulfill their credit obligations. In fact, good financial management is a key foundation to ensure the continuity and growth of MSME businesses. This includes wise financial planning, monitoring income and expenditure, and making sound financial decisions. With good financial management, MSMEs can avoid serious financial problems, increase profitability, and open up opportunities for expansion. So, what are some strategies that MSME players can do to manage their business finances effectively? And why is it important to do so? Check out the explanation here!
What is the Importance of Managing Finance for MSMEs?
One of the goals of building a business is to make a profit. To achieve this, MSME players need to understand how to manage finances. Especially generally, there are many expenses in the early days of building a business and the profits are not too large. Therefore, it is important for MSME players to manage finances effectively and ensure that your business can grow and develop well. Here are some reasons why good financial management is very important for MSMEs:
Knowing the Financial Condition of MSMEs in Real-Time
Managing finances regularly will help business owners understand the current financial condition of their MSMEs, such as profit or loss generated, financial balances, and debts to be paid.
Meeting Financial Obligations
Generally, MSMEs have financial obligations such as paying financial salaries, debt wages, and meeting tax obligations. Effective financial management ensures that the business can fulfill all these obligations in a timely manner.
Making the Right Financial Decisions
By managing and knowing the financial condition of MSMEs in detail, business actors can make the right financial decisions to grow their business, such as expanding the products or services offered, adding employees, or managing debt properly.
Avoiding Financial Problems
Managing finances well can also help businesses avoid financial problems such as too much debt or bankruptcy. This will help MSMEs remain stable and grow gradually.
Attract Investors or Lenders
If MSMEs plan to attract investors or borrow money from lending institutions, good financial management is very important. This is because investors or lenders will tend to provide funds to MSMEs that have organized and stable finances.
How to Manage MSME Finances Effectively?
By now, you know that ensuring the financial quality of a strong and independent MSME is a must. But in making it happen, intention alone is not enough. Business owners must start paying attention and find the right way to manage finances. It is important to realize that the way to manage finances for each business will be different. But with the same goal, business actors can take the essence of tips on managing finances from MSMEs, companies, and successful businesses. There are many ways that business actors can do to manage MSME finances, including the following:
Setting Financial Usage Goals
From the start of establishing MSMEs, business owners need to set financial spending goals by reducing expenses and achieving profitability earlier. Business owners should do their utmost to change the habit of spending money on various costs or expenses that are irrelevant to business goals. Instead, businesses should plan a budget over a one-year period for major expenses such as shop rent, payroll, taxes, interest, cost of goods sold (COGS), payables, utilities, and other operating expenses to ensure the cash flow position of the business remains strong, even when business is not healthy.
Separating Personal and Business Finances
When starting an MSME, entrepreneurs are required to open a special bank account for the business. Personal and business accounts should be separate to make it easier to get the right calculation results at the end of the financial year. It will also prevent business owners from cash crunch situations in the business caused by the use of funds for personal needs. Cash flow that is mixed between personal and business finances can make it difficult for MSME players to determine business operating costs.
Develop Financial SOPs
If you want MSMEs to continue to grow, business actors must develop a strict financial SOP blueprint since the beginning of the business. This financial SOP contains procedures and mechanisms for supplier payments, valid proof of transactions, and so on. This will help MSME players to supervise. If later they already have financial employees, the SOP will help prevent fraud.
Recording Expenses and Income
Financial recording is very important for any business, especially for MSME players. Given that there are still many MSME players who often ignore this. In fact, recording all business income and expenses every day is essential so that it can be controlled properly. Business actors must know the operational costs, the amount of profit earned, and the amount of capital used. Thus, MSME players can evaluate the ability and capacity of their business, so that they can plan business development.
Evaluate Financial Condition Routinely
No matter what type and size of business you run, knowing the flow of money in detail and efficiently is a must. The purpose is for financial management purposes. Evaluating finances on a regular basis will be a difficult and tedious activity, but it should be done consistently to make it easier to track all capital movements. Later on, MSME players can evaluate and determine the areas that perform most efficiently and the sectors that need to be controlled. MSME players also need to study financial flow data to develop a more realistic budget.
Avoiding Borrowing Business Capital with High Interest
As a business owner, especially an MSME, optimal use of funds is the key to success. Therefore, avoid borrowing too much business capital. It is recommended to avoid business capital loans with expensive principal values and high interest rates. This is to avoid the possibility of default. Do not let business expenses swell just because you have to pay off the principal and interest on debt from capital loans.
Managing Debt
The last thing that needs to be done in managing MSME finances is managing debt. Business debt can improve business performance, but uncontrolled debt can only cause financial problems. Ensure that the debt-to-asset ratio is no more than 50 percent and the debt-to-income ratio is no more than 30 percent. Therefore, before applying for debt, it is important to plan very carefully. If you are forced to take on debt, make your calculations as realistic as possible. Make a personal plan and target in paying off the debt. The sooner it is paid off, the sooner MSMEs will be free from financial burdens. Those are seven ways that can be done in managing MSME finances. Hopefully, the above explanation can help you to manage and build MSME finances properly and wisely!
ALSO READ: Let’s Check the Latest MSME Final Income Tax Rate and How to Calculate It Here!
Financial management is very important for a business. The more developed the business, the more complicated the way to manage the business finances.
KH Contact
For KH Pals who are currently running an MSME business and find it difficult to manage their finances, do not hesitate to ask for help from expert mentors or business experts, one of which is Kontrak Hukum. Yes, in order to bring convenience to business people in running their business, we present the first subscription service in Indonesia called Digital Business Assistant (DiBA) for all your business needs! The DiBA service includes invoice recording, expense recording, bank reconciliation, monthly financial reports, and monthly tax reports. Guaranteed reliable and affordable when compared to using accounting firms, accounting teams, and accounting software so it is very suitable for MSME players.
What are you waiting for? Make your business financial management needs easier by visiting the KH – DiBA Services page. If you still have doubts or questions, you can also get a free consultation at Tanya KH or send a direct message (DM) to Instagram @kontrakhukum. With KH, #semuajadiberes!
