In this article, you will learn about the importance of financial history records and how financial history records for MSMEs can be highly beneficial in the long run.
Financial history is one of the essential things to run the ever-growing and evolving world of finance. Amongst all the growth and momentum, there is also a lot of noise that can distract and outright lead to certain financial losses.
Just like the world’s history is essential to ensure that things run smoothly, the same way we need economic history as well. It is necessary to understand that just as we learn from our world’s history, we can often learn a lot from our mistakes in finance through financial history records.
This is a lot more important for small-scale industries because the growth of MSMEs is highly reliant on critical and precise decisions that are often taken from financial statements. Financial history records for MSMEs are primarily overlooked and underrated.
This article will cover the basics of MSMEs and how financial history records for MSMEs can be highly beneficial in the long run.
What are MSMEs?
Before 2006, MSMEs were also known as small-scale industries. With the passing of the MSME law in 2006, small-scale industries were further divided and categorized into three separate parts, namely Micro, small and medium enterprises. They were set apart and ranked based on the need for capital and output in terms of revenue.
Any industry or firm that did not come under a mentioned cap was not categorized as an MSME. Based on the country’s government, each industry has a cited barrier to the level of capital. This means that you will essentially not be able to run your “small scale business” with money that exceeds the government’s regulations.
Hence this is the primary limitation that sets apart the different industries. For example, the capital limit on micro-businesses should not exceed more than 1 Cr, and its annual income should not be more than five cr.
On the other hand, for small-scale businesses, the capital is capped off at ten cr and revenue is capped off at 50. For medium enterprises, money is capped off at 50 cr, and the payment is capped off at 250 cr. These laws and regulations help the government keep a better track of industries and companies currently operating.
Moreover, businesses under the MSME Act are likely to get better provisions for loans and grants.
Now let’s take a look at what and why financial history records for MSMEs are vital.
Financial History Records for MSMEs
Financial history records can be simplified into financial statements. But historical records can go way back. Financial statements usually refer to the current year’s performance reporting, but the economic history record can date years back to the inception of the MSME. These financial history records for MSMEs serve as a standard backbone for financial decisions and strategy.
Based on the previous financial decisions that the company has made is what will decide the longevity and performance of the enterprise there on out. It consists mainly of various determinants and tools of finance such as cash flow, taxes, loans, debtors, creditors, etc.
This is very important and will reflect the actual state of the company. For example, let’s say an MSME wants to set a new output goal for the new financial year. This cannot be arbitrarily decided as it will have no standpoint or foreground.
This should be determined based on the previous year’s performance and set a new goal that surpasses the old one. Financial history records for MSMEs help them have leverage and do better in the current market.
Income Statement for MSMEs
The income statement is a crucial financial determinant employed in evaluating a firm’s business performance. An income statement outlines the cash generated by a firm in a particular financial year by dividing the cash flow into different operation heads.
The income statement enables stakeholders seeking information to grasp what is the business’ revenue model and how much the enterprise is generating cash. Concerned parties also perform a thorough analysis of the business trends and derive several calculations that assist in decision-making.
The essence of money flows is essential during a business. A steady cash flow reflects a business’ viability and how long it can keep up without having to resort to loans to fulfill operating expenses.
The amount made on the operations of a company need not exactly match the level of income that they get from customers. It is the key reason why the turnover is usually considered vain.
The income statement shows the online cash position of the corporation in a very given period after making adjustments to information recorded within the profit-and-loss account and record.
Importance of Cash Flow Statement for MSMEs
Cash flow essentially shows how liquid a company has in its assets. It pinpoints the exact level of cash or cash-related assets that currently flow in the company or the firm. It also shows the level of cash and cash equivalents needed to repay creditors and other loan-related aspects.
Moreover, it also pinpoints the amount of cash needed for capital expenditure which encompasses the needed amount for buying machinery and other assets. In general, it’ll allow the data users to assess the flexibility of a firm to satisfy its several investment requirements.
Next, the income statement reflects which variables affect the assets and liabilities in the business and the operating expenses of an enterprise. As the name suggests, an income statement is a mirror to the internal ongoings in a company. Where and how much the cash is being moved is all reflected in the income statement. For instance, any sale or purchase of inventory will be recorded in an income statement.
Last but not least, the income statements help in estimating future incomes: Past cash flow statements, together with other financial accounts, will permit the data users to predict the long-run cash flows of an enterprise.
Importance of Financial History Records for MSMEs
1. Better Credit Scores
Based on an enterprise’s performance, banks, institutions, and even informal sources will lend money. If there has been no history of the enterprise in terms of its performance, chances are they may not lend you money on a trust basis.
The quality of performance based on the financial history records for MSMEs is one of the primary standards on which institutions calculate credit scores.
2. Better Performance
Financial history records for MSMEs are crucial to serving as a landmark for better performance. Companies can learn a lot from their financial reporting, and based on the results that they infer, they can do better to increase performance and quality.