Building a company from the ground up is one of the most difficult things you can attempt. So many things can go wrong – and so many usually do. These jottings will deal with some common mistakes startups make, and simple ways of avoiding them. Manage Your Cash Flow Many startups do not pay attention
Building a company from the ground up is one of the most difficult things you can attempt. So many things can go wrong – and so many usually do. These jottings will deal with some common mistakes startups make, and simple ways of avoiding them.
Manage Your Cash Flow
Many startups do not pay attention to this, finding themselves cashstrapped soon after having raised funds through considerable persuading. Get professional advice on building and implementing a simple cash flow forecasting and management system. The key team members should meet as a Management Committee every week, and review the cash flow plan. The plan must be updated and the forecast revised based on actual figures and developments. All numbers should be validated by the finance department, and variations explained and understood. Inflows should be conservatively estimated and outflows treated as non-negotiable. Outflows should be categorised on the basis of ‘statutory dues’, ‘payroll’, ‘accounts payables to suppliers’, ‘operational expenses’, and ‘administrative expenses’.
Track All Key Expenses
During the startup phase, it will be difficult to foresee expenses. You will have to make choices, based on the resources you have raised, and need to have a good grip on the implications of such decisions. It is ideal if you could do this yourself at this phase as you may not be able to afford to have a finance professional on your payroll. Doing it yourself will also help you when it comes to budgeting for the next accounting period, and also when dealing with your tax returns. Remember to prioritise statutory dues as they cannot be delayed.
Control Fixed Expenses
During the takeoff phase, keep the staff to the minimum required level. You will need to focus on production and business development at this phase, till you are past the Proof of Concept stage, and have started to generate revenues. Take advantage of shared facilities that are springing up in cities and towns, and resist the temptation to have a smart office with the usual trimmings. Using Uber, Airbnb and similar facilities will help keep your costs down in this phase. Encourage team members to work to budgets, instead of entitlements and travel rules, and leave it to them to decide on how to optimally use the budget allocated.
Have a Backup Plan
Your cash flow forecast, while being realistic, may still go wrong due to unforeseen developments. You should have the reserves to see you through. The backup plan should also involve strict expenditure cuts which may mean letting people and teams go. The overriding consideration in such situations should be that the company must keep on running at any cost.
Time is Money
The biggest waste of money is under-utilised manpower. Build a culture of time management in your company from the beginning. Meetings must start and end on time, staff must be in office on time and leave when the office closes. That will develop a culture of using time fruitfully, and prevent the emergence of a culture of working late to impress the boss. Sending and receiving emails should not interfere with real work, and people should be trained to look at work in this way. Managing your time and that of your team will yield as large returns as turning over your inventory quicker.
I know from experience that many crises startups face are avoidable and happen due to inadequate attention to managing finances. This is more so when promoters are technically skilled and the startup is based on a technical innovation. Companies with good products and profitable business models have gone bankrupt since they did not have the money to pay the bills when it mattered. It is wise to include a finance person in the promoter group from the beginning, as this will free the others to focus on technical matters, without neglecting the important finance function.
Founder President, TiE Kerala, Angel Investor, Mentor and Author