What is Financial Discipline and why is it important?

If you’re a startup or an SME entrepreneur, it’s really important that you know where you are right now and what you want to achieve in the future. It's also important to know what your risk appetite is like and the challenges associated with it.?Most of it is related to financial management. But financial management covers a broad area that includes investments, debt, banking, assets & liabilities.?Financial discipline is about the practice of making informed and disciplined decisions in these areas.

?What I try to do is help you understand your do’s and don'ts. The following can be used as some tips to establish and improve the financial discipline in your organization.

?Prepare & maintain a budget

A?budget is a guide to manage your operations, set revenue targets, and manage expenses. Preparing a budget for the first time can be daunting but it’s well worth it. You may prepare it with basic details and then develop it to a much more comprehensive model - this is my suggestion if you’re just starting out.?A few details that you may consider can be;

• Price of the product/service and the expected volume (Pricing & Marketing strategy)
• Direct & indirect expenses
• The expected growth rate over a set period (Operational strategy)
• Other important factors relevant to your business (exchange rates, interest rates, etc.)

Developing the discipline of reviewing the budgets Vs. the actuals is usually an eye-opener. This is when most first-time entrepreneurs really understand why they’re just rolling things through and why they seem to be out of money constantly. As you get more experienced in understanding the budgets and P&L accounts, you also learn to understand the reasons for the variances. This is important. When you understand the reasons for the variances, you learn how to adjust your plans according to what happens in the present and revise them as the market conditions change.?

?Plan and manage cash flows

In a business, we have cash inflows and cash outflows. In general, we call them cash flows.?We know that there's always a time gap between getting money (inflow) and paying money (outflow). There are planned transactions and not-so planned ones. On top of that, you also have to make strategic decisions that can have a long-term impact on the business. There are 3 main types of cash flows. These are;

• Operational cash flows (standard income and expenses)
• Investment cash flows (buying/selling of assets)
• Financing cash flows (share issue, loan borrowing/settlements)

At an early stage, a startup or an SME won’t have much leverage to dictate terms to their partners/stakeholders. But this leverage usually improves with time if you meet the commitments with them as agreed. You can negotiate better terms especially when you place regular orders and make payments on time. You can even negotiate discounts if you are a customer who always pays on time. As they say, ‘your net worth is your network’. The better you maintain your network, the better the trust among the parties, leading you to work towards better credit terms. Among these credit terms, you can have extended credit periods, bulk discounts, fixed pricing, discounts for early settlements, etc.?

Maintain Credibility

Financial institutions reject most of the loan requests made by Startups and SMEs. If you have ever spoken to a relationship manager of your bank, he/she would say that your CRIB report (The Credit Information Bureau of Sri Lanka) has issues. What does this mean? The Credit Information Bureau of Sri Lanka records and captures every deposit and borrowing that you’ve made in every financial institution in the country. Anyone who reviews this report would know whether you've made the payments on time or not. This applies to both your personal or company loan facilities.

?With the CRIB reports, things can get quite complicated. For instance, once a trade facility of a company that I consulted was rejected because a director of the company had not paid his housing loan on time during the past 6 months. So it’s important that you don't take the different credit facilities for granted. Always have the discipline to make payments on time.?

?These 3 tips are perhaps the most important traits that you need to develop for the financial discipline of your organization. There are many instances where you can use your financial discipline to your advantage. For example, you can get a corporate credit card and buy all your equipment on a?five-year 0% installment plan. As long as you pay your monthly installment on time, you’re going to get benefitted from the exchange conversion loss, and the inflation loss. What’s more, you will also have a stellar CRIB report helping you to smooth out any further banking facilities that you may apply for.?

?Having good financial discipline is a must in this day and age. Having it would allow you to protect and preserve your business from unexpected and undesired challenges. But importantly, financial discipline allows you to be a better and respectable corporate citizen.