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Setting up Your Accounts-Part 1

by Sanjeev Archak Sanjeev Archak No Comments

When you are starting your business handling accounting and compliance can be daunting. There are a few  common mistakes that early stage businesses commit; of course with the right advice you can avoid these pitfalls. Part 1 of this blog looks at setting up your accounting system.

Open a Bank Account

It is best to open a current account for your business. This current account must be used to deposit all your sales income & paying all the business expenses. Of course there is a wide choice of banks to choose from, here are some factors to be kept in mind while choosing a bank account:

Bank charges: look at how much the bank charges for NEFT/RTGS, ATM Withdrawals, foreign currency receipts and payments, forex rates etc.

Minimum balance requirements: check the minimum balance requirements in the account. Also ease of operating the net banking must  be checked.

Mobile banking: choose a bank which offers mobile banking. This will save you a lot of time.

Separate Your Finances

There needs to be separation between yourself and the business. The individual and the business are not necessarily the same. How this works will depend on your legal structure:

For Sole Traders/Owners: if you’re a self-employed sole trader then your business and personal money are one and the same, legally speaking. But to manage your accounts, it’s still essential to have two separate bank accounts and to keep detailed financial records.

For Companies: a company is a legal person separate from its shareholders & directors. Companies are required to have bank accounts in company’s name.

Accounting for business and personal money separately allows you to have the best possible overview of how the business is faring – and is vital for tax purposes.

Keeping Tax Records

One can never escape taxes, as a business you will have to pay tax. It is a legal requirement, under GST & Income Tax Law, to have books of accounts. How much tax you have to pay depends on your legal structure. So as a business you must:

Know your tax liabilities: which depends on the legal structure of your business. Tax rates are different for companies & individuals.

Digitise your records: Income Tax Law requires you to maintain records for a minimum of seven years. Similar requirements are there in the Companies Act as well. So it is prudent to digitize your records.

Pay Taxes on Time: by paying taxes on time you will avoid payment of penalty. Let our experts at Integra Books help you with taxes.

Choose Cloud Accounting Software

Put your accounting on the cloud. A good cloud accounting software has the following features:

Ease of Use

Automation

Integration with other Apps

Zoho Books is a cloud accounting software which ticks these requirements. Zoho Books integrates with a whole range of Zoho Apps and will put your entire business on the cloud.

You can read a related blog here. Stay tuned for Part 2.

Bank Reconciliation: Why?

by Sanjeev Archak Sanjeev Archak No Comments

Bank Reconciliations. Sounds very tedious. But doing some boring and tedious work can save you from pitfalls. So sit back and read more about the need to do bank reconciliations.

What is bank reconciliation?

As the word reconciliation suggests, you will be comparing bank statements with your books of accounts for the same period. The idea of any comparison is to find discrepancies and rectify them.

Who is responsible for bank reconciliation?

If you do your own accounting, then it is you. If you have an accountant then it is the accountant. You will need to do bank reconciliation only if you are following the accrual method of accounting. If, on the other hand, if you are following the cash method of accounting, then you record every transaction at the same time as bank does; there should be no discrepancy between your books and your bank statement.

Still wondering which method of accounting to use? Read our Cash vs Accrual accounting for more.

Why should we do bank reconciliation?

1.So you don’t spend the money that you don’t have

If your bank account and your books don’t match up, you will end up spending money you don’t really have or holding on to the money you could be investing in your business.

2. To track cash flow

Cash is king. Reconciling your bank statements lets you see the relationship between when money enters your business and when it enters your bank account, and plan how you collect and spend money accordingly.

3. To detect frauds

Bank reconciliation will not stop frauds but will help you detect when it has happened. For instance, you could pay a vendor by check, but they could tamper with it, making the amount withdrawn larger, and then cash it. The discrepancy would show up while you reconcile your bank statement.

4. To detect errors

Banks are not infallible, they do make mistakes. Such errors maybe rare. If there’s a discrepancy in your accounts that you can’t explain any other way, it may be time to speak to someone at the bank.

5. Stay on top of accounts receivable

If you use the accrual system of accounting, you might “debit” your cash account when you finish a project and the client says “the cheque is going in the courier today, I promise!” Then when you do your bank reconciliation a month later, you realize that cheque never came, and the money isn’t in your books (even though your bookkeeping shows you got paid).

Bank reconciliations are like a fail-safe for making sure your accounts receivable never get out of control. And if you’re consistently seeing a discrepancy in accounts receivable between your books and your bank, you know you have a deeper issue to fix.

Conclusion

Doing bank reconciliation sounds easy but in reality it is not so. Here is where Zoho Books can help. You can sync your bank accounts with Zoho Books and even make vendor payments directly from Zoho books using the ICICI+Zoho Books integration. Reach out to us today to learn more.

What happens if you don’t do your accounting?

by Sanjeev Archak Sanjeev Archak No Comments

You are a business owner and you are juggling sales, marketing, hiring, managing payroll and employees. The chances are that you will be letting boring things like accounting stack up into a mess. Maybe you are waiting for the tax season to arrive. What happens if you don’t do your accounting?

There is a good change that you are likely to end up in a big mess and there might be a hefty price tag.

You will never have clear view of your business finances

If you put a full stop to accounting, your books will no longer show a clear picture of your company’s financial viability. Without accurate records, it can be difficult (or nearly impossible) to track cash flow projections and statements.

Without accurately measuring cash flow, you can obscure issues like overdue invoices, held inventory, or recurring variable expenses like shipping costs or salaries. A clear break up fixed and variable costs allows you to find out your break-even point.

Your cash flow shows when money is coming in and what bills need to be paid. If your business is failing to track cash flow and you’re struggling financially, having a paper trail can reveal the problem. But, without accounting there is no trail—just a stack of papers on a desk somewhere.

Financing options become limited

Let’s face it; no bank will lend you without proper financial statements. Without evidence of your financial history, securing loans, bringing on investors or partners, or selling your business will be an uphill grind.

Your invoicing cycle goes haywire

You could keep a mental note of who owes you what, but we’re all human—we all make mistakes. Are you sure you didn’t forget about the invoice for the client who always pays late? If you did, they’re not going to voluntarily remind you that they owe you money. The slower you are at organizing outstanding invoices, the longer your business will go without those funds.

Payroll problems start to rise

If a system of checks and balances isn’t in place, issues with payroll can happen. Without proper bookkeeping, you might be under-compensating (or overpaying) employees without knowing. Generating Form 16 for tax filing will be a huge problem. Moreover, this can cause tax problems for the employees as well.

Managing expenses becomes tricky

Having a shoebox of receipts might sound easy enough, but this is not going to save you money. Without proper bookkeeping, your business could suffer from slow leaks.

Accounting backlog drains your time and money

Tracking down a year’s worth of records on your own takes you away from running the day-to-day operations of your business—and catch up accounting can make a stressful time of the year even worse.

If there isn’t a system in place for monitoring your books, your accountant is going to need ample time to sort through the mess, and it will cost you money

You will get in tax trouble

Filing tax returns without books of accounts is near impossible. All tax filers declare that they are providing correct information in their returns. Therefore, providing incorrect or false details will lead to penalties.

So we have answered  the question of “What happens if you don’t do your accounting?”. Get in touch today and save yourself a load of trouble.

Latest GST updates

by Sanjeev Archak Sanjeev Archak No Comments

The GST council held its 39th Meeting on 14.03.2020. The Council has taken some important decisions relating to interest on delayed payments, GST returns, and rates of GST among other things. In this blog we present to you the latest GST updates, read more below:

1.Interest on delayed payment of GST

The GST department had starting sending out notices for delayed payment of GST last month. You can read more about it in our detailed blog post .The GST department had clarified that the interest will be levied on net liability of GST. The GST council has now endorsed this decision and has provided the legal backing.

2.Changes in Due Dates for Annual Returns

The due date for filing Annual GST returns (in Form GST 9 & 9C) for F.Y. 18-19 has been extended upto 30.06.2020. This earlier due date was 31.03.2020. Further, MSME’s having turnover below Rs 5 crores have been granted relaxation from filing Form GST 9C (Auditor certificate). In some good news to the tax payers, late fees for delayed filing of Forms GST & 9C has been waived for FY 207-18 and 18-19 for tax payers having turnover of less than Rs 2 crores. It is important to note that Form GST 9C need not be filed by tax payers having less than Rs 2 crores in turnover.

3.Postponement of E-Invoicing

The Govt had announced a mandatory e-invoicing procedure for tax payers having turnover of more than:

  1. Rs 100 crores for B2B transactions
  2. Rs 500 crores for B2C transactions

This feature involved uploading invoices on the GST portal with a QR code. E-invoicing was supposed to start from 01.04.2020 but now has been pushed to 01.10.2020.

4.Postponement of New Returns

Further, the new returns scheme that was to come into effect from 01.04.2020 has been pushed to start from 30.09.2020. You can read more about the new returns here. The GST 3B and GST1 will continue until 30.09.2020.

5.Know your Supplier

It is proposed to introduce a new “Know your supplier” facility within the GST portal. Further, details are awaited on how this will be made available

Final Thoughts

So these were some of the latest GST updates.The GST back end, managed by the GST Network, has been beset with problems from inception. Very often, the servers of the GST crash when the return filing load is higher. The capacity of the GSTN to handle a large number of returns is doubtful. Frequent changes in the law have also caused problems for the tax payers and GSTN as well. The GST council has set a target of July 2020 to resolve all IT problems. Let us hope all is well by the said date.

What is EBITDA? Why is it important?

by Sanjeev Archak Sanjeev Archak No Comments

This is  blog is a first in a series of wherein we explain “Accounting Terminology”. The most used term is EBITDA. What is EBITDA? And why is it important?

What is EBITDA?

EBITDA is an acronym that stands for “Earnings before Interest, Taxes, Depreciation and Amortization” and it’s used to measure the overall financial health of the business. Let’s understand more of these terms.

  1. Earnings=net profits
  2. Interest=expenses paid out for borrowings
  3. Taxes=income tax or local taxes paid
  4. Depreciation= decline in the value of tangible assets employed by the business
  5. Amortization=decline in the value of intangible assets employed by the business

How is EBITDA used as financial metric?

EBITDA is an indicator of the financial performance of a business. As a business you can use EBITDA number to get a clear idea of your company’s value. Also, it presents the worth of your business to outsiders.

How to calculate EBITDA?

EBITDA=Net Income+ Interest+ Taxes+Depreciation+Amortization

Why is EBITDA important?

A profit and loss statement contains both operating and non-operating expenses. EBITDA removes the impact of the non-operating expenses while measuring the performance of a business.Interest,taxes,depreciation and amortization are non operating expenses. Further, EBITDA provides a meaningful comparison between different companies in various sectors. This enables you map your performance with competitors. EBITDA as a unit of measurement is not accepted by all, the prominent one being Warren Buffet. That being said EBITDA will remain an important financial metric always.

Do check out some of our other blogs here.

 

MCA:SPICE+

by Sanjeev Archak Sanjeev Archak No Comments

The Ministry of Corporate Affairs has rolled out a new Form for incorporating companies. This new Form called SPICE+ was launched on 25.2.2020. SPICE+ offers 10 services of the Central Government and one State Government, thereby making it easy for starting a business.

This new form is part of Government of India’s Ease of Doing Business Initiative (EODB Index). India has been steadily moving up on the EODB Index over the last few years. The Ministry of Corporate Affairs centralized the incorporation process a few years ago to bring down the time it takes to incorporate a company. Further, an automated approval system was introduced for a number of Forms to replace the manual approval process. This was not the case previously when one had to wait for approval for adding/deleting directors,changing registered office etc. Delays in approval were common and were a hindrance to business. Now let’s look at the features of the new SPICE + Form:

What is the difference between SPICE & SPICE+?

SPICE+ offers 10 services of the Central Government and one State Government, thereby making it easy for starting a business. SPICE was a form used only to incorporate a company, apply for PAN and TAN. Moreover, SPICE + is a web form to be filled in and submitted on the MCA portal by registered users. 

What are the contents of the SPICE + Form?

The Form contains a PART A which has to be used to apply for a name. The PART B offer the following services:

  1. Incorporation
  2. DIN allotment
  3. Mandatory issue of PAN
  4. Mandatory issue of TAN
  5. Mandatory issue of PF registration
  6. Mandatory issue of ESI registration
  7. Mandatory issue of Profession Tax registration(Maharashtra)
  8. Mandatory Opening of Bank Account for the Company 
  9. Allotment of GSTIN (if so applied for)

How to use SPICE+?

SPICe+ Web form is a post-login service and existing registered users would need to login into their account using their credentials. New users are required to create a login account first before using the service. An application number will be given to an application for Name reservation/Incorporation which is yet to be submitted/uploaded by the user.

What are the new fields in PART A of the Form?

New fields introduced are:

  1. Type of company
  2. Class of company
  3. Category of company
  4. Sub-Category of company
  5. Main division of industrial activity of the company
  6. Description of the main division

Is it permitted to apply for two names in the SPICE+ Form?

Yes. However, a fee of INR 1000 becomes payable if applied separately.

How many changes can be made to SPICE + Form after generating PDF and affixing Digital Sign’s?

Changes/modifications to SPICe+ (even after generating pdf and affixing Digital Sign), can be made up to five times by editing the same web form.

What is the procedure after filling the SPICE +?

Once the SPICe+ is filled completely with all relevant details, the same would then have to be converted into pdf format. The digital signatures will have to affixed and uploaded.

Is Registration for Professional Tax Mandatory?

No. It is mandatory only for companies incorporated in the state of Maharashtra w.e.f 23.02.2020

Is Registration for PF & ESI Mandatory?

Yes. Registration for PF & ESI is mandatory now companies incorporated w.e.f 23.02.2020. This rule is new addition and effectively takes away the exemptions for registration under PF and ESI Acts.

Is opening of a Bank Account mandatory for all companies incorporated w.e.f 23.02.2020?

Yes. All companies started using the SPICE+ will have to open bank accounts using the AGILE PRO linked forms. Thus far only two banks viz, Punjab National Bank and Kotak Mahindra Bank have been added by the MCA and more are awaited. There is no fee prescribed by the MCA for account opening.

What is AGILE PRO?

AGILE-PRO contains application for GSTIN/EPFO/ESIC/Profession Tax Registration (in Maharashtra) and Opening of Bank A/c.

Is it mandatory for all Directors and Subscribers to obtain Digital Signatures & DIN (Director Identification Number?

Yes. It is mandatory for all the proposed directors to have a DIN. Further, all the subscribers to MoA & AoA to have Digital Signatures.

How is the approval of the SPICE+ Form communicated to the user?

On approval of SPICe+ forms, the Certificate of Incorporation (CoI) is issued with PAN as allotted by the Income Tax Department. An electronic mail with Certificate of Incorporation (CoI) as an attachment along with PAN and TAN is also sent to the user. Further PAN card shall be issued by the Income Tax Department.

How much is the registration fees?

 A consolidated challan gets generated at the time of filing SPICe+  which shall contain applicable fee towards:

  1. Form Fee
  2. MoA
  3. AoA
  4. TAN
  5. PAN

Final Thought’s

This initiative by the Government is good one but there are problems as well. Registration under PF and ESI has been made mandatory. This means that every company even without crossing the required employee strength under PF & ESI law has to get registered.  The PF &ESI Acts grants exemption from registration based on the employee strength. This mandatory registration nullifies the exemption. Companies will have to file at least “NIL” returns every month to avoid penalties under these Laws.The Government needs to re-examine the  mandatory PF & ESI registrations, as they will increase the compliance burden on businesses. 

Moreover, the MCA has needlessly mandated opening of Bank Accounts with only two banks as of now. Further, the account opening has to be done through AGILE PRO forms. This  amendment  will force companies to deal with only two banks till other banks are listed.

 Want to incorporate a company? Get in touch now.

GST News-GST Interest: Delay in Payment of GST

by Sanjeev Archak Sanjeev Archak No Comments

Here is the latest GST News- GST Interest  on delayed payment of taxes.The Government has started sending out notices for recovery of interest on delayed payment of GST. GST interest has been on the radar of the GST department for a long time. This move comes after the GST collections have been below par this year. The, Central Board of Indirect Taxes and Customs (CBIC), which administers GST in the country, has issued a notification on 10.02.2020 requiring payment of interest.

Notices for payment of interest are being sent for the Financial Years 2017-18, 2018-19 and 2019-20. The CBIC estimates that Rs 45,996 crores remains unpaid to the Government on account of delayed payment of taxes.

Initially, the CBIC insisted that the interest be paid on the Gross Tax Liability (before setting off input credit). However, in a series of tweets the CBIC has clarified that the interest will apply on the Net Tax Liability (after setting off input credit). This is a relaxation given by the Government, despite the Telangana High Court ruling that interest can be charged on the Gross Tax as well.

Provisions of the GST Law

Section 50 of the CGST Act, empowers the Government to collect interest on tax dues. Tax dues are defined as tax payable without including interest, fees and penalty. However, the GST portal does not allow filing of returns without payment of tax. Hence, the Government imposes interest only after payment of taxes and not at the time of filing returns.

Rate of Interest

The rate of interest is 18% p.a.The interest is calculated from the date on which taxes become due till the payment of tax.  The calculation is done based on the net tax paid and the date of filing the return.

GST Return Details

Net Tax Paid

Total Interest

Return Month

Due Date

Date of Filing Return

Delay in Days

IGST

CGST

SGST

 Interest

IGST

CGST

SGST

Dec 19

20/01/2020

18/02/2020

29

100

100

100

18%

1.43

1.43

1.43

Nov 19

20/12/2020

18/02/2020

57

200

200

200

18%

5.62

5.62

5.62

Oct 19

20/11/2020

18/02/2020

90

200

200

200

18%

8.88

8.88

8.88

 

 

 

Total

500

500

500

 

15.93

15.93

15.93

How to pay interest?

The interest has to be paid after a notice has been received from the GST department. The notice so issued will contain the interest payable for every financial year. The interest on late payment of tax has to be paid  in Form DRC 03.This challan is available online on the GST portal. A copy of the challan has to be sent to the jurisdictional GST Officer. Further, such payment has to be made within 7 days of receiving the payment notice.

Final Thoughts

The levy of interest on delayed payment of tax is not new in India. Interest has been levied on delayed payment of income tax, service tax, and value added tax since long. It’s only now that the GST department has started the interest levy as well. However, on might argue that The GSTN requires a late fees payment of either Rs 100 or Rs 10 per day if returns are not filed on time. 

Delayed filing of returns will now incur fees for late filing as well as interest for delayed payment of taxes. Always file your returns on time. We can help. Get in touch today.

How to make smart decision using Financial Statements

by Sanjeev Archak Sanjeev Archak No Comments

Okay. Let’s start with the most quoted phrase “Data is the new oil”.A business operation contains tons of data in receipts, vendor bills, customer receivables, subscriptions, inventory among other things.All this can be overwhelming for a business owner. This information if used and analysed correctly, can drive growth in the business. In this post we shall explore how to make smart decisions using financial statements.

What are financial statements?

Financial statements comprise of:

  1. Profit & Loss Statement
  2. Balance Sheet
  3. Cash Flow Statement

In addition to the above you can add Financial Forecast or Budget Statements to the list. Now, let’s examine each of these items and how it can contribute to your business.

Profit & Loss Statement

This statement is also called as Income Statement. This statement will show:

  1. Revenue: sales generated in a particular period
  2. Costs: expenses incurred in a particular period
  3. Profits: which is the net of sales and expenses

Maximizing profits must be the ultimate goal for a business. This information will help you create a budget, control your expenses and increase your revenue. In order to make informed decisions financial statements must be compared for different periods to form a trend. Here is how a trend can help:

1.Check how your business is doing

Maximizing profits must be the ultimate goal for a business. Gross profits and net profits are useful indicators. These are often termed as top line and bottom line. An upward curve for both top and bottom line indicates that your business is making money.

2.Where are you spending your money?

A cursory glance at your Profit & Loss statement will tell you where you are spending your money. Hence, ensure that there are clearly marked accounts in your expenses list like rent, salaries, and internet expenses. It is important to avoid accounts like suspense or loosely defined account heads like miscellaneous expenses. A multi-year comparison will tell you not just where you are spending but will compel you to look for reasons as to why you are spending.

3.Increase your margins

Margins are also called as Gross Profits. In simple terms Gross Profits=Sales minus cost of goods sold. What is Cost of Goods sold? Let’s take an example of a business selling toys.  The cost of purchase includes:

  1. Cost paid to the wholesale merchant/distributor
  2. Cost of transportation to the store
  3. Any other cost incurred in procuring the toys

It is important to note that cost of goods sold does not include indirect costs of such as rent, salaries or electricity. A lower cost of goods sold will lead to a higher margin. Therefore, in most businesses it is easier to control cost of goods than increase the sales price. A lower gross margin is a  sign that the business is under stress.

4.Impact of taxes

Taxes cannot be avoided. So there must be plans to minimize and plan your taxes. Tax planning includes a whole range of factors starting from selecting the legal entity for your business, availing sector specific deductions, labor law compliance’s etc. Always look for trained help to manage your taxes. Let our experts at Integra Books help you.

Balance Sheet

As the name indicates it is a statement that balances assets and liabilities. A balance sheet is a point statement i.e., that indicates the total assets and liabilities of a business as on particular date. Let us now look at what a balance sheet contains:

  1. Assets: this what your business owns
  2. Liabilities: this what your business owes

A healthy balance sheet must be asset heavy and light on liabilities. Further, while looking at a balance sheet you are likely to see terms like current assets, current liabilities, equity etc.

What is an asset?

Assets are what you have acquired to run your business. Assets are further divided into fixed assets and current assets. Fixed assets are defined as assets which are used to produce goods or render services. In other words, fixed assets are not held for sale. Examples of fixed assets include machinery, computers, and trademarks.

Current assets are typically held for sale. A prime example is inventory. Inventory is sold to generate revenue. Sales proceeds in the form of cash or bank balances are current assets as well. Dues from customers are also classified as current assets. Current assets can be converted to cash within six months to one year.

What are liabilities?

As the name suggests, liabilities are what a business owes to others including banks, lenders, vendors, credit cards, government and employees. Further, liabilities are grouped into current and non-current liabilities.Current liabilities are likely to be paid within one year whereas non-current liabilities are to be paid after a year.

How to compute working capital?

Working capital is the oxygen that keeps a business alive. How to compute working capital? It is done through a simple formula:

Working Capital=Current Assets minus Current Liabilities

A positive result means that the business will not run of cash in the near future. Whereas, a negative result means that a business will have to borrow money to meet expenses.

How does working capital impact a business?

All right let us break this down. Two important items of current assets are customer dues and inventory. High customer dues will lead to low cash balances as recovery is low. Similarly, a high inventory means that sales are low. Money invested in producing these goods is not getting converted to sales. 

Therefore, with cash becoming scarce a business no option but to hold off on paying current liabilities. This will lead to delayed payments to vendors, lenders or even employees which can lead to  halting the business.

What is equity?

Equity is what the sole owner or shareholders have invested in the business.  Theoretically, the business owes back the invested money to the investors.

Cash Flow Statement

The success of a business can be measured by its free cash flows. A cash flow statement indicates the 

  1. Cash Inflow: cash from sales, loans etc.
  2. Cash Outflow: cash paid to vendors, employees etc.
  3. Cash balance: Net off inflow and outflow

A positive cash flow means  cash coming into your business is more than cash going out. This denotes that your customers are paying on time and vendor gets paid on time. This is an ideal situation where  your business can run without taking on debt. As a business owner you must always have  an eye on the cash flow statement. It is imperative to have a positive cash flow.

Your business’s financial data will help you make informed, strategic decisions that maximize revenue and turbo charge your business’s growth. In order to stay ahead you need the best technology available. Zoho Books is a cloud based accounting software which has a dashboard which containing all the vital details of your business. Not just that there are tens of reports which you use to make informed decisions.

Of course, you need a combination of technology with human expertise. At Integra Books, we combine technology with the best experts to provide the best services. Get in touch today.

Purchase Order-Purchase to Payment Cycle

by Sanjeev Archak Sanjeev Archak No Comments

A purchase order is a document sent from a purchaser to a vendor to confirm a specific purchase of goods or services. One little document can go a long way in clearing up the logistical confusion of a growing business. A purchase order is an important part of the purchase to payment cycle.

What is a purchase order?

A purchase order is raised by a buyer to a vendor. A purchase order denotes what exactly the buyer requires, terms of the delivery, quantities and prices of products or services. Often a purchase order is initiated by the purchase manager in an organization. Further, the purchase order or P.O. as it is called, goes through multiple levels of approval within the organization. Post approvals it is sent to the vendor. Needless to say, quotations have to be obtained from vendors before a P.O. can be raised.

Zoho Books allows the users to configure multi-level approvals for a purchase order with e-mails or in app notifications sent to all stakeholders.

Why use Purchase Orders?

1.They make life easier:

A purchase order is a document which puts down in writing the deliverables of a vendor. It is the best way to avoid miscommunication and time consuming back and forth with vendors. Further, all the internal stakeholders in the business are aware of what is purchased and can plan the business ahead.

2.Provides audit trail:

Purchase orders remove a lot of stress from the auditing process by providing auditors with a conclusive audit trail and an easy way to cross-check invoices and packing slips. Without purchase orders, prepare for a long, painful process of poring over invoices, receipts and emails with vendors.

3.Purchase Order is a legal document:

Once a vendor acknowledges a P.O. as accepted by him, it creates a mutually binding contract between the buyer and the seller. The seller is bound to deliver as per the terms agreed.

4.Tracking Orders becomes easy:

A purchase order makes it easy to track the goods and services coming into a business. It is essential for a business to track when shipments are arriving, how to pay for them etc., a concept like “Just in Time” will work only if production planning works in sync with purchase and receiving functions.

What should the Purchase Order Contain?

Here is list of items a P.O. must contain:

  1. P.O. Number
  2. P.O. Date
  3. Vendor name and billing address
  4. Buyer name and shipping address
  5. Additional contact information
  6. Delivery date
  7. Shipping method
  8. Shipping terms
  9. Item name
  10. Item description and technical information
  11. Item quantity
  12. Item unit cost
  13. Line total
  14. Taxes
  15. Total price
  16. Payment terms

What happens to a P.O. goods or services are delivered?

Upon the delivery of the goods, a goods received note (GRN) is generated detailing the items received. This GRN is compared with the P.O. to check if the ordered goods have been received. If the GRN is in agreement with the P.O. it is forwarded to the accounting department and the P.O. is “closed” The accounting folks do a three way match between:

  1. Purchase Oder
  2. Goods Received Note
  3. Vendor Invoice

If all three are in agreement, then the vendor is paid. This completes the “purchase to payment cycle”.

When not to raise a Purchase order?  

Certain regular, recurring purchases relating to the day-to-day operations of a business including rent, electricity, internet are usually billed for the month and do not require a purchase order.

We hope in this post we have able to address the basics of the Purchase to Payment cycle.

How to reduce debt?- An easy guide

by Sanjeev Archak Sanjeev Archak No Comments

All businesses have to borrow at some stage to fund growth. Debt in your balance sheet is not an unusual item. However, it is not a comforting factor in your financial health. India has seen several large scale debt related defaults by large corporate’s. This begs the question-How to reduce debt? Debt Management is the answer.

Here’s a step-by-step plan to help you reduce your business debt, so you can reclaim your sanity and start focusing on other important tasks.

Start with a Budget

We can’t emphasize how important it is to have a budget. In fact, we have written a whole blog about this. A budget is the best way to set target for revenues and limits for costs. Measuring these targets with actual revenues and costs will give you a good idea where you stand as a business. A business owner will actually be able to determine how much he can borrow and how long it will take to repay the loans.

Make a repayment plan

EMI’s for debt repayment are known to very borrower right from the start. So for a business, it is all about having money to fund the repayment schedule. One of the key aspects of this plan is cash flow management. A business needs to have enough cash for EMI payments. There are two thumb rules a business can use to save cash:

  1. Control spending: spend only on essentials. This is a tough plan which requires a lot of discipline.
  2. Earmark cash for repayment: set aside a % of your sales or profits each month to pay EMI’s

Set an “Exit Date” for Debt

This is a part of the “Repayment Goals”. Marking out a date in your calendar to be debt free will keep your motivation levels up. The lenders too would have specified a repayment schedule and pre-closures are not penalized anymore by lenders.

Negotiate Terms with Vendors

It is simple, ask for more credit. Most successful retail companies let vendor manage their working capital for them by asking for discounts or more credits. This will help you streamline your cash flows as well.

Avail the right debt product

 Identify the debt product which works best for your business. If working capital is what you are looking for then consider availing cash credits, overdraft or a working capital term loan. However, if you want to fund an asset purchase then avail a term loan. The security for the loan depends on the type of loan for e.g, for an asset purchase a mortgage on the asset will be security. However, an overdraft or a cash credit will be secured with stock or receivables of the business.The interest rates for these debt facilities vary as well. Choose an option that suits you best.

Renegotiate the terms of loans

What if you are not able to pay EMI’s? Don’t panic. You always have the option of renegotiating your loans. This requires the lender to recast the repayment schedule or include a moratorium period. Additionally, you can ask for a funding of interest via a funded interest term loan. This is easier said than done as it takes an excellent track record of the borrower to renegotiate.

Keep an eye on margins

Interest payments have a huge impact on margins. It is important to minimize the hit of interest on margins. As a business change your product or service mix to reduce low margin offerings.

Explore leasing

Leasing equipment’s often works out cheaper than owning them. Leasing will help reduce huge upfront payments for equipment’s.

Final Thoughts

It’s perfectly normal to be worried about repaying loans. The best way of getting rid of this stress is to pick debt management/reduction ideas, commit to a plan and make it happen.