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Early Financial Mistakes By Start-ups

Early Financial Mistakes By Start-ups
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You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

In India, start-ups have become the new trend, the dream of most engineering and business management graduates, and even of many drop-outs. Year 2015 saw several being set up every day in every conceivable field. 

2016, however, has witnessed areverse trend. Not only there has been a fall in the number of new start-ups springing up, but many of them are shutting shop. Also, the decrease in the inflow of funds this year has resulted in some minnows merging with older and larger ventures.

For every start-up that succeeds, there are many hundreds and thousands that fail despite being highly innovative and well-funded. The reasons are many, but most are related to financial mismanagement.

If budding entrepreneurs paid half as much attention to the financial aspect of their business idea, as that given to the technological, marketing, valuation and fund-raising aspects, the chances of survival and success would be far greater.

Be Clear About the Revenue Model

Much thought goes into the ‘idea’ that has captured the entrepreneur’s imagination and not enough attention is paid to the financials and the revenue modelling. Without a clear idea of how and from where the revenues are going to be generated, the venture would be a non-starter.

Businesses cannot be run for long on investors’ money alone.

Generate Profits and not Sales

In those cases where there is an understanding of the revenues, the entire focus is on increasing top lines. Entrepreneurs must never forget that the business of running a business is not to generate sales but to make profit. Selling is a means towards achieving an end, and the end is to make a decent, a healthy profit.

In India, start-ups have become the new trend, the dream of most engineering & business management graduates, and even of many drop-outs.

Year 2015 saw several being set up every day in everyconceivable field.

2016, however, has witnessed a reverse trend. Not only there has been a fall in the number of new start-ups springing up, but many of them are shutting shop. Also, the decrease in the inflow of funds this year has resulted in some minnows merging with older and larger ventures.For every start-up that succeeds, there are many hundreds and thousands that fail despite being highly innovative and well-funded. The reasons are many, but most are related to financial mismanagement.

Pay Attention to the Cash Flows

One of the first lessons that an entrepreneur learns is that there is no connection between the profit that a business earns and the bank balance that it has. In fact, if there is a
connection, it is inverse. The higher the profit, the lower the bank balance.

‘Where is the money?’ is a question that perpetually haunts an entrepreneur. Accountants tell you that the business is making impressive sales and profits, but where is the money!

Why can’t you see it in the bank?

Well, you are making profit precisely because you money has been deployed. If you started hoarding it in the bank it would be a matter of time before you would stop making profit too.

Working Capital is very Essential

While evaluating the funds that a start-up needs, it is relatively easy to understand the amount of fixed capital required. But often the working capital requirement is not clearly understood. Consequently many such ventures are starved of the working capital for sustaining the operations on a day-to-day basis.

Among those businesses that close down due to shortage of funds, a large percentage do so due to a shortage of working capital. Start-ups must take great pains to ensure that only longterm funds are used for long-term purposes and short-term funds are used for short-term purposes.

Never ever use short-term funds for long-term purposes. It would be suicidal to do so. If start-ups pay heed to the finance management aspect of their business it will go a long way towards sustaining their venture and making it a success.

This article first appeared in the Indian edition of Entrepreneur magazine (August 2016 Issue).