Each section names the problem, the idea in one line, what you will be able to do, and the method from the book.
1. Your P&L, read as an owner
The problem: You know your sales, but not your profit or your cash.
Read the profit and loss account from the top in the owner's order: what you sold, what you kept, what your overheads took, and what was left.
By the end of the chapter you can:
- Rewrite your P&L in the owner's order on one page
- Find your gross margin by product line
- Spot the four most common misreadings
Gross margin: the first number to protect
Gross profit is sales minus the cost of the goods you sold. For a trader, that cost is mainly purchases. For a manufacturer it includes materials, factory labour and power. For a service firm it is the direct cost of delivering the work, such as project staff or subcontractors.
Gross margin is gross profit as a share of sales. It is the first number to watch, because every overhead, every loan and every rupee of your profit has to be paid out of it.
| Kaveri's product lines | Sales | Gross margin | Gross profit |
|---|---|---|---|
| Steel utensils | ₹240 lakh | 20% | ₹48 lakh |
| Non-stick cookware | ₹150 lakh | 26% | ₹39 lakh |
| Pressure cookers | ₹120 lakh | 18% | ₹21.6 lakh |
| Small appliances | ₹90 lakh | 26% | ₹23.4 lakh |
| Total | ₹600 lakh | 22% | ₹132 lakh |
The blended 22% hides a wide range. Selling ₹10 lakh more non-stick cookware adds ₹2.6 lakh of gross profit; selling ₹10 lakh more pressure cookers adds only ₹1.8 lakh. That is why the mix of what you sell matters as much as the total.
2. Set it up once
The problem: Your accounts are always behind, or nobody checks them.
Most bookkeeping problems start with a poor set-up. Get three things right once, and the daily work becomes simple.
By the end of the chapter you can:
- Design a list of accounts that gives you useful reports
- Organise your bank accounts by purpose
- Draw the document flow for purchases and sales
Bank accounts that do one job each
Many small businesses run everything through one current account, with personal spending mixed in. A few accounts, each with a clear job, make the books simpler and the cash easier to read.
| Account | Job | Why it helps |
|---|---|---|
| Main collections account | All customer receipts: UPI, card settlements, platform payouts, cheques | One place to match every rupee received |
| Payments account | Suppliers, salaries, rent; topped up from collections | Spending is visible and controllable |
| Tax reserve account | GST and TDS collected, moved here weekly until paid | You never spend money that belongs to the government |
| Cash credit or overdraft | Working capital borrowing only | Borrowing does not hide inside daily banking |
| Owner's personal account | Owner's salary and drawings only | Business and personal stay apart |
3. Your cash cycle in days: stock, customers, suppliers
The problem: Salaries and supplier payments worry you every month.
The cash cycle is the number of days your money is stuck between paying for materials and being paid by customers. Every day you cut frees cash; every day you add costs it.
By the end of the chapter you can:
- Work out stock, debtor and supplier days
- Put a rupee value on each day of your cycle
- Choose where to shorten the cycle first
Working out your days
You need four figures from your accounts: yearly sales, yearly purchases (or cost of goods), and the closing balances of stock, debtors and suppliers. Use averages if your balances swing through the year.
| Days | Formula | Sutlej |
|---|---|---|
| Debtor days | Debtors ÷ yearly sales × 365 | ₹296 lakh ÷ ₹1,200 lakh × 365 = 90 |
| Stock days | Stock ÷ yearly materials and other direct costs × 365 | ₹72 lakh ÷ ₹660 lakh × 365 = 40 |
| Supplier days | Suppliers ÷ yearly purchases × 365 | ₹54 lakh ÷ ₹660 lakh × 365 = 30 |
| Cash cycle | Stock days + debtor days − supplier days | 40 + 90 − 30 = 100 days |
4. Who gets credit, and how much
The problem: Customers owe you more than you can afford to wait for.
Credit is a loan you make to a customer. Decide it the way a careful lender would: check first, set a limit, and review it.
By the end of the chapter you can:
- Check a new business customer in under an hour
- Grade customers and set credit limits
- Choose terms that match the risk
Checking a new customer
A good check takes less than an hour and uses information that is freely available, or that the customer will give you if asked.
| Check | Where to find it | What to look for |
|---|---|---|
| Who they are | GST registration details; company or LLP records if registered | Legal name, address and age match what you were told |
| GST filing record | The public GST search for their registration | Returns filed regularly |
| Company filings | The government's company records for companies and LLPs | Accounts filed on time; loans secured on their assets |
| Trade references | Two or three of their suppliers | How fast they pay; any disputes |
| Credit report | A business credit report from a credit bureau, with consent | Defaults, overdue loans |
| A visit | Their premises | Activity, stock, staff: does it look like the business described? |
5. Your real cost per product
The problem: You're busy all year, and little is left at the end.
You cannot know which products, jobs or clients make money until you know what each one really costs, including the costs that do not appear on the bill of materials.
By the end of the chapter you can:
- Build a unit cost that includes every variable cost
- Cost a job or client in time and rupees
- Share overheads without distorting decisions
Costing a product
Work from a standard batch or recipe, then add every variable cost per unit. Use real figures from the last few months, not the figures you hope for.
- Write the recipe or bill of materials. Quantities for a standard batch, including what is lost in processing.
- Price each input at today's cost. The latest purchase price, including freight in and taxes you cannot claim back.
- Divide by the good output. Not the theoretical output: what actually comes out sellable.
- Add packing and any variable labour per unit. From your last month's consumption.
- Add channel, freight, returns and payment costs per unit. Different for each channel; cost each separately.
- Compare with the price you actually receive. After discounts and schemes, not the list price.
6. What each unit really earns
The problem: You're about to expand, hire or take a big order.
Growth is a multiplication: more customers, orders or outlets, each earning the same. If one unit earns little, more of them earns little more, and needs more cash.
By the end of the chapter you can:
- Choose the right unit for your business
- Work out the contribution and cash need per unit
- Compare channels and customers on the same basis
Contribution per unit
Start with contribution: the price received, less every cost that rises with the unit. Then add the costs that come only with winning and serving that unit.
| Vastra Craft: one kurta for a fashion brand | Per piece | % of price |
|---|---|---|
| Price received from the brand | ₹480 | 100% |
| Fabric and trims | ₹216 | 45% |
| Stitching (piece rate) | ₹86 | 18% |
| Packing and freight | ₹19 | 4% |
| Agent commission and other variable costs | ₹24 | 5% |
| Contribution per piece | ₹135 | 28% |
An order of 2,000 pieces earns ₹2.7 lakh of contribution. Against that sit the costs that come with the order: samples, pattern making, fit sessions, and the cash tied up until the brand pays.
7. Registration and schemes
The problem: GST feels like a monthly mystery, or it eats your cash.
Whether to register, and under which scheme, depends on who your customers are and how you sell, not only on your turnover.
By the end of the chapter you can:
- Know the questions that decide registration
- Compare the regular and composition schemes
- Decide, with your CA, which suits your business
Regular scheme or composition scheme
Smaller businesses may be able to choose a simpler composition scheme: tax paid as a small fixed percentage of turnover, fewer returns, but important restrictions. Whether it pays depends on who your customers are.
| Regular scheme | Composition scheme | |
|---|---|---|
| Who can use it | Any registered business | Smaller businesses within a turnover limit, with exclusions |
| Tax paid | Output tax less input credit | A fixed percentage of turnover |
| Input tax credit | Available | Not available |
| Charge GST to customers | Yes | No: customers cannot claim credit |
| Interstate sales | Allowed | Generally restricted |
| Returns | More frequent and detailed | Simpler |
8. Expenses that count
The problem: Tax time brings panic, surprises or notices.
An expense reduces your tax only if it is for the business, allowed by law, and backed by records. The records are the part owners most often neglect.
By the end of the chapter you can:
- Apply the tests for a deductible business expense
- Avoid the most common disallowances
- Keep evidence that stands up to questions
Payments in cash
The tax law discourages large cash transactions in several ways. Limits change, and they apply to payments and to receipts, so ask your CA for the current figures and build them into your rules.
| Cash rule (in outline) | Effect |
|---|---|
| Expenses paid in cash above a daily limit to one person | The expense can be disallowed |
| Receiving cash above a limit from one person in a day or transaction | Can attract a penalty equal to the amount |
| Cash loans and deposits above a limit | Can attract penalties |
| Cash withdrawals above limits | TDS may apply on the withdrawal |
| Large cash deposits | Reported to the tax department; may lead to questions |
9. Sole proprietorship
The problem: Your business has outgrown its legal form, or partners disagree.
A proprietorship is the simplest way to run a business, because the business and the owner are the same person. That same fact is its main weakness once the business grows.
By the end of the chapter you can:
- Explain how a proprietorship works in law and tax
- Recognise when it has been outgrown
- Protect a proprietorship while it suits you
Where it stops working
These signals suggest a proprietorship has been outgrown. Two or more together are a reason to review structure with your advisers.
| Signal | Why it matters |
|---|---|
| Large personal guarantees and security for business debts | Family wealth is fully exposed |
| Others want to own a share: children, staff, partners, investors | A proprietorship cannot have co-owners |
| Large contracts or customers ask for a company | Some buyers and tenders prefer or require one |
| Higher-risk activity: products, projects, liability claims | Claims fall on the owner personally |
| Profit high enough that a different form may be more tax-efficient | Worth a CA's comparison |
| No plan if the owner dies or cannot work | The business may stall while heirs sort out the estate |
10. The loan menu
The problem: You need a loan, or your loan terms worry you.
Each type of loan is built for a particular need. Using the right one is often cheaper and always safer than stretching the wrong one.
By the end of the chapter you can:
- Describe the main business loan products
- Match each need to the right product
- Spot when a product is being misused
Term loans
Term loans fund long-term assets and are repaid in instalments over several years. The repayment schedule should match the life and earnings of what they fund.
| Feature | What to look for |
|---|---|
| Tenure | Long enough that EMIs fit the asset's earnings; not longer than its useful life |
| Moratorium | A period before repayments start, for assets that take time to earn |
| Rate | Fixed or floating; linked to a benchmark plus a spread |
| Security | Usually the asset financed, sometimes more |
| Prepayment | Whether you can repay early, and at what charge |
11. Who invests
The problem: You're thinking of bringing in an investor, or listing.
Investors differ in what they want, how long they stay and how involved they become. Choose the investor as carefully as the price.
By the end of the chapter you can:
- Describe the main kinds of equity investor
- Match investor types to your plan
- Check an investor before you sign
What each wants
Understanding what an investor needs makes negotiations easier and the relationship smoother. Ask each investor directly; good ones answer openly.
| Question to ask | Why it matters |
|---|---|
| How long do you usually stay invested? | Tells you when they will want an exit |
| How do you usually exit? | Listing, sale to another investor, sale of the company, buyback |
| What role do you take? | Board seat, monthly reviews, hiring support, or hands-off |
| What rights do you usually ask for? | A preview of the term sheet (Chapter 6) |
| Can we speak to owners you have invested in? | Including ones where things went badly |
| Will you invest more later? | Whether they can support the next round |
This article is adapted from the book. Examples marked “Example” use invented names and numbers; company stories are based on public sources listed in the book. Education only: not investment, tax or legal advice.
