Businesses, specially in early phase, focus more on increasing top line (Turnover) and eventually start focusing on bottom line (Net Profit). But during this journey, a robust process implementation often left behind. Imagine a bucket with holes, even if you efficiently keeps pouring more and more water into it, how likely is you will succeed in filling the bucket full ? Same is with businesses, lack of well planned processes will cause in losses in some or other way and it might even results in hindrance to business goals.
Startups, among others, have these two unique features, 1) it grows multiple fold and more rapidly 2) it do not have well established and time tested processes
During an interview with a sales head of a rapidly growing startup, the sales head mentioned that they have increased the market size in a big way and the sales team has not only met the sales target but also exceed the same. The sales team has been duly rewarded and the achievement has been well appreciated and celebrated. But story doesn’t end here. When our team analysed the success story viz-a-viz financial numbers, the so called success story turned disastrous. While the gross margin on sales was 5.5%, there was a total of 17% bad debt. which means the Company has made 11.5% loss on the sales value leaving other cost behind. Who was to blamed here? The sales team, who were following the sales target assigned to them by Sales Head or the Sales Head who was eyeing to increase the top line as an overall objective ? While the meeting sales target is always important, onboarding right customers is essential. Had the Company had well documented credit rating and customer onboarding process, the chances of debt going bad would have been reduced to tolerable limit. The further investigation revealed that the single transaction credit was given to few who has annual turnover in past less than the total value of such credit sales.
In an another case, a shoe manufacturing company was facing big number of post season end return requests from distributors. Reaching to root cause, we came to know the new season items reaches to distributors only in the middle of season instead of start of season. The Company’s MD was of the opinion that since the company operates in fashion industry, they should give only latest fashion, they were surprised to hear our advise to start production planning nine month before the first targeted dispatch. We had to really made them write the different activities from product designing till dispatch along with required time. When asked to calculated the total required time, then only they agreed to our suggestion. Desire is one thing but we must evaluate the practicality and resources.
Having lack of processes doesn’t always impact on profitability or meeting business goal, there may be cases where impact is as low as non availability of desired data for analysis. However, non analysing for want of data may ultimately cause losses. For example, in a bill to ship transaction with zero inventory model, if the complete trail of transaction is not maintained, chances of non-identification of a loss transaction increases. Therefore, one must properly make a trail from purchase to sales to collection.
The founders definitely focus on top line and bottom line building, they should also focus on brand and wealth building, however, at a right time, they must not forget to build the best processes for the company. As the moment company grows, and team size increases, the only way founders can rule the operation is by implementing the standardised processes. We have helped in process reengineering activity of many grown startup as well as well established SMEs. Our team can help you in your process implementation drive through their skills and industry knowledge. Should you have any query regarding process engineering, internal financial controls or internal audit, please feel free to write at pkg@nucleusadvisors.in
Pravesh is a Chartered Accountant and Commerce Graduate from Delhi University. He lives in Delhi. He has in-depth knowledge on subjects like International Taxation, Domestic Taxation both Direct & Indirect, Risk Management, Controls Setup and Information Technology. With his ability to design system operated controls, he has helped many small to large enterprises in setting ups financial as well as non financial controls thereby mitigating the Risks they were exposed to. He can be reached at pravesh@nucleusadvisors.in or +919999957077
