How Can Early-stage Start-ups Manage Their Finances
Being bootstrapped, it is important for a founder to calculate every move and literally, every penny
For a newbie entrepreneur, there are a lot of risks involved in starting up. From pressures of not going the conventional way of working 9 to 5 with a fixed income to the worries of the idea failing and most of all, the impending question about where will the funds come in from for day-to-day operations.
Being bootstrapped or having borrowed money from friends and family, it is important for the start-up founder to calculate every move and literally, every penny.
Entrepreneur India spoke to start-ups to talk about how they managed their finances when they were in an early stage and the tips that entrepreneurs should keep in mind while starting up.
Putting a Cap on Operations
Haven't we all heard about success stories that started from a one-bedroom apartment or a garage? For an early stage start-up, the start is usually not with a splash. With modest means, start-ups start out small so as to save on the running an operational office. Harshil Mathur, co-founder and CEO, Razorpay, left his high paying job to get into entrepreneurship. And so he left the big city dreams and retired to his hometown Jaipur to start operations. "Living in a smaller city helped us reduce the company burn, keep costs at a minimum and also the city provided us a startup ecosystem which understood the importance of co-existing and developing," said Mathur.
Until they raised their first round of funds, they handled their finances cautiously and didn't hire any new employees other than the core team. Mathur decided not to rely on funding just because it's readily available in the market. "One should not raise funds if you really don't need it as it will be the most expensive cash you ever buy. If you let investor funding become the driver for your business early on, it's very difficult to wean yourself off of it as you grow," he said.
Log In All Expenses
It's important for every entrepreneur to keep a track of all their expenses to ensure they are not going overboard. Mukesh Manda, co-founder, Tinmen (that was acquired by Zomato), believes that in the first few months of starting up, founders often tend to ignore the finances and keeping a track on the transactions. "When we started, we kept it basic. In fact, we logged in each and every expense on Splitwise, which is actually meant for friends to share their expenses. But as we started growing, we switched to Tally," he said.
Manda believes that documenting transactions right from the start, doesn't take much time but also comes in handy later during raising funds when the due diligence is done.
The same is believed by most experts. Ajay Jain, an angel investor, shares that one of the biggest mistakes that start-ups do while starting up is that they do not manage their cashflows. "Billing doesn't mean coming into the bank," said Jain.
Long-term Perspective Needs to be Kept in Mind
For start-ups to be successful, Jain believes that founders need to be encouraged to keep a long-term perspective of at least 6-8 months. Another point that founders need to keep in mind is that most partnerships or critical hiring in the initial stages should be done on an equity model which helps even the partners or new hires get interested in the progress of the company.
Jain said that smartness overall is critical when it comes to spending. Indian start-ups usually don't focus on the finances, he said. "The position of a CFO is underrated. But it's a critical position that helps a start-up understand their cashflow. Even as a founder, one should know if they are taking too much salary, which an external expert can help him or her figure out," said Jain.