Financial Control- Key to achieve Financial Prudence for SMEs in India

Robust financial controls can improve the sustainability of organisation as well as support the growth ambitions among SMEs in India

Recently I had an interaction with one first generation entrepreneur who is undergoing financial distress. He explained his growth story and his own take on reasons for his distress. He has been undertaking much specialised custom made solution for very large companies in different verticals. He started without any capital, leaning solely on his intellectual capital. The growth was very good. He did not take any loans from formal sources like banks till recently. He was by and large dependent upon private money lenders for meeting the financing needs. Every time when he decided to borrow from banks, the proposal was not receiving good review as he did not have proper financial and other documents required to make banker accept his proposal. However he had been restless and went on to borrow from private sources. He used to decide to borrow instantly on ad-hoc basis. As macro- economic situation turned bad in last two years, large companies started delaying their capital investment plan. This had affected him badly. In turn his cost of private borrowing complicated the situation and slipped to distress.

What went wrong?

No doubt he established a niche specialization in the business and was successful. However what was missing is poor financial management. Though business started two decades ago, he did not take little time away to analyse the growth opportunity and devise a financial strategy to make best of this opportunity. When there is a need for money he used to borrow from private sources which are easy and satisfy his time line. While this was giving short term happiness, slowly it was eating into his long-term survival prospectus. Since there is no formal banking arrangement, there was absolutely no scrutiny of his books. The audit was just a ritual wherein he hardly attend meeting with auditor and his assistant used to communicate with auditors and get the process completed. By ignoring such meeting with auditors, he missed an important opportunity to improve his financial discipline. Not just that, he floated three to four firms to minimise the tax burden as there is no excise duty for turnover exceeding Rs 1 crores. Complexities are beyond imagination. Everything is on thumb rule and kept in his mind.

What could have saved him? – Implementation of Financial Controls:

Firms, like buildings, need solid foundation to grow. The right infrastructure and processes are crucial for operational efficiency. It is sound financial management that will help to realise twin tasks of growth and sustainability of a firm. Financial controls are tools which interfaces the strategy with fiancé.
In case of small businesses, Financial Control is budgeting exercise. The topic of budgeting may be boring and seems like another financial jargon which many entrepreneurs think less significant compared to their hard work and strategies that have gone into their successful running of the company. However budgeting is important and can be seen in every successful growing organizations’ DNA. There are two types – Cash-Flow Budget and Income & Expense budget. Cash-Flow budget keeps check on inflow and outflow of cash. Secondly it brings into focus the nature of source of cash and its significance in relation to business (for ex high cost short term debt to meet long term needs). Income and expense budget deals with composition of income and break up of expenses statement over a period. This will improve the visibility of operating surplus for long term sustenance.

Very entrepreneur should work on monthly budgeting and having a forecast of two months before him and at the same time ensuring that it converges well with annual plan. This comes out as guidance for him and the rest to act accordingly. Every month one should put little effort to sit and compare the performance vis-a- vis budget. If there is any change needed for two months ahead, necessary adjustment should be made.

The circumstances for an entrepreneur to put in place Financial Control:

We list out the few possible circumstances if any entrepreneur experiences with the aim to sensitise them to put in place financial control process as below:

1. The firm is too small to support full time professional for accounts.
2. Absence of a partner having expertise in the matter of finance
3. You have no visibility of business and most of the decisions are taken on gut feel
4. Accountant is there but limits himself to book keeping
5. The level of financial control does not seem commensurate with size
6. You are in a fast growth and need guidance for keeping a check on finance
7. Sudden Business changes( upward or downward)
8. Profit does not seem to compensate for your level of effort
9. You can’t seem to get your employees to take accountability for business process
10. Personal finance is muddled with company finance
11. Eluding precise forecast of funding requirement
12. Improving the governance to elicit better response from banks/investors

Audit – A pre-requisite:

Audit by Chartered Accountant of books of accounts is an important pre-requisite for SMEs to build robust financial control for the business. However many of the SMEs in India are not attaching importance to this process. Many a time assistants are asked to meet auditors and get the required compliances. I came across a company wherein promoter pleaded that he is not aware of his auditor which is being attend to by his Accounts Manager. Though it sounds awkward, but it is not uncommon among SMEs. Secondly many entrepreneurs are comforting themselves in the exemption limit for mandatory audit by CAs. Though there is an exemption from audit upto a certain limit, it is still advisable to go through audits process as that can support small businesses’ growth.

We emphasize that all entrepreneurs should have an auditor and make it a point to meet auditor frequently and discus the business scenarios. They will sensitise on good practices and their inputs will help to build a good financial control for the company.


Financial controls are tools for entrepreneurs for tracking progress, evaluating performance and benchmarking standards. These controls will effectively bridge the financial plan to P&L results.  Also it contributes to risk management. Financial controls free an entrepreneur’s energy to devote to core area and capable to bring entire team to focus on common goals.

To supplement the above we suggest you to visit the following links in

  1. Risk Management
  2. Financial planning