Startup Saturday: Where’s the money? Plan, so it flows
Anil Lamba is a chartered accountant who runs his own consultancy and is very passionate about financial literacy. He aims to make more and more people financially literate and to that end, holds workshops, gives lectures to varied audiences in the hope that more people begin to understand finance and thus, manage their businesses and lives better. He also works with startups, guiding them on how to manage their finances. Here he shares with HT the financial mistakes start ups make.pune Updated: Dec 03, 2017 15:06 IST
Anil Lamba is a chartered accountant who runs his own consultancy and is very passionate about financial literacy. He aims to make more and more people financially literate and to that end, holds workshops, gives lectures to varied audiences in the hope that more people begin to understand finance and thus, manage their businesses and lives better. He also works with startups, guiding them on how to manage their finances.
Here he shares with HT the financial mistakes start ups make.
It is a good thing that startups have become sexy. Our country is seeing this new trend where people choose to opt for their own businesses rather than look for a job. It has become a dream of most engineering and business management graduates, and even of many drop-outs, to have their own company. Year 2015 saw several being set up almost every day in every conceivable field.
2016, however, has witnessed a reverse trend. Many startups started shutting shop and there was a considerable fall in the number of new startups springing up. Reduced inflow of funds resulted in mergers of some startups with larger, older businesses. For every startup that succeeds, there are thousands that fail despite being highly innovative and even well-funded. The reasons are many, but most are related to financial mismanagement.
The chances of success would be much greater if only such start ups paid greater attention to the financial aspect of their business. Here is a short list of what an entrepreneur should do to run a sustainable business
Be clear about the revenue model
Startups are full of energy and passion. They are gung ho about what they are about to achieve. They spend all their hours into the technology, the idea, markets, fund raising and everything else, but very little time is spent on understanding from where the money will come. A business cannot run on investor’s money for too long. It is imperative that your business starts generating enough revenues to at least meet operational costs, if nothing else. This is one of the biggest follies. No business can survive without a proper revenue model. Without a clear idea of how and from where the revenues are going to be generated, the venture will be a non-starter.
Generate profits, not only sales
This is another misunderstanding startups have. They think that revenues or sales are important. So the entire focus is on increasing top lines or revenues. What about profits? One must never forget that the entire aim of business is to make profits. Simply generating revenues is not enough. Selling is a means towards achieving an end; and the end is to make a decent, healthy profit.
It is important to understand the difference between a Flipkart or an Uber model. These companies spend all their energies on generating volumes while making losses on every ride. The difference is that the Flipkarts and Ubers have very, very deep pockets and can sustain such losses for a long time. If a startup copies this model chances are that they will go bust well before a white knight with shining deep pockets gets impressed by such sales volumes and decides to invest in the business. While making a business plan there should be complete clarity on how the business is going to make profits.
Pay attention to cash flows
Often entrepreneurs often do not understand the connection between the bank balance and profits. Again they mistake a large bank balance with profit. If at all there is a relation between the two, it is inverse. The higher the profit, the lower the bank balance.
‘Where is the money?’ is a question that’s constantly on the top of the mind for any entrepreneur. Accountants will tell you that your business is making very good sales and profits, but where is the money? Why can’t it be seen in the bank?
Well, what you need to know is that you are making profits precisely because your money is not in the bank, but has been deployed to do its work. If you started hoarding it in the bank it would be a matter of time before this would impact your business and you would stop making a profit. What is the point in making profit if at the end of the month you don’t have the money to pay salaries.
Always remember the two pillars that successful businesses stand on:
1) The ability to generate profit
2) The ability to effectively manage cash flow.
Working capital is very essential
While evaluating the funds a startup needs, it is quite easy to understand the amount of fixed capital required. Often it is the working capital needs that are difficult to understand. As a result many such ventures get starved of working capital for sustaining operations on a day-to-day basis.
This is one of the reasons that businesses close down – shortage of funds and a large percentage of that is due to a shortage of working capital.
Working capital is required for:
1. Purchasing materials and maintaining inventories (in case of organisations engaged in manufacturing/trading).
2. Meeting day-to-day operational expenses.
3. In cases where credit is involved and goods and services are sold thus, working capital is required to invest in your customers too.
It is suicidal to use short-term funds for long-term purposes
Startups must always remember that long-term funds are meant for long-term purposes. Never use long-term funds for short-term expenditure. Keep the two separate. Use short-term funds for short-term expenses. Mixing the two can be suicidal for a company.
It is, therefore, important that startups pay heed to the finance management aspect of their business. It will go a long way towards sustaining their venture and making it successful.