Money steps that you must take before initiating your start up

Anil Rego
Right Horizons
You must have surely opened the papers and read about how another ecommerce company has raised a few million dollars from venture capitalists. But behind this hype over unicorns, eyeballs and venture funds, there is a much starker truth that most of us tend to overlook. According to conservative estimates, 80-85% of the start-up s go out of business due to lack of financial planning and bad cash flow management. In fact, with some prudent financial planning and conservative spending habits, entrepreneur s can have a much better chance of making a success of their venture.

Take the case of Vivek, a bright young software engineer who has decided to chuck his cushy job in the US and don the role of a web entrepreneur in India. He has savings of Rs.30 lakh approximately, which he accumulated during his stint in the US. In addition, his investments yield him a monthly income of Rs.25,000. As his son is a toddler, his wife is not in a position to take up a job for the next couple of years. So how should Vivek manage this balance between his business needs and running his family? The answer, as we mentioned previously, lies in prudent financial planning and conservative spending habits. This is especially true in case of Vivek since he has no other source of income for a couple of years and his business will suck up a lot more cash than he can imagine.

Step 1: Have a separate income stream for your family expenses...

Most of us think we have sufficient savings to start without thinking much how much we need and how long. More importantly, how much our family needs during the time, we don’t have sales and only the costs. So, if our families and business are going to fall back upon the savings, then it will deplete faster than anticipated. We need to ensure that in the early stages of business, family expenses do not become a burden on business. Setting aside a corpus like 1-year of household expenses for the family would help to focus more objectively on the venture. If your monthly expenses are Rs.25,000, then set aside Rs.300,000 in safe and liquid investments. If options are available, it is also advisable to take up part-time jobs which should help to manage the liquidity better.

Step 2: Ensure that you are adequately insured for exigencies...

This may sound like an added expense, but it is worth it. Firstly, you need to ensure that your life is insured, ideally through a low cost term policy, for giving security to your family. Secondly, take medical insurance for yourself and your family. Today, there are plentiful insurance options available at very low prices. This will protect your family first and if required your business as well in the times of exigencies. Health and term policies are an absolute must before you embark on a business venture.

Step 3: Focus on getting revenues and collections...

Let us assume that Vivek projects to earn Rs.2 lakh per month from client fees and spend Rs.3 lakh per month on developing and running his business. He will be falling back upon his savings to bridge the gap of Rs.1 lakh each month. If his projected revenues are short of Rs.2 lakh for a few months, then he will be depleting his saving corpus faster. How can Vivek address this issue? Give discounts and incentives for early payments. Give importance to collections as cash today is more valuable than cash tomorrow.

Step 4: Be a penny-pincher on managing costs...

Steve Jobs, while recounting his experience at Apple, clearly underlines the need to be miserly with respect to costs. It is costs that are entirely in your control. There are a few basic steps that an entrepreneur can take. Firstly, prefer to rent office and furniture and avoid splurging on fancy interiors. Secondly, small costs tend to balloon over a period of time. Be tight-fisted with respect to cost items like stationery, electricity, consumables etc. Today, most of the facilities are available on rent. Look for flexible offices, which could not only reduce your fixed costs, but also help you not to touch your savings kept for the family. Develop a habit of recording expenses and analysing, which should further help you to identify relevant and non-relevant expenses and curtail them where possible.

Step 5: Avoid the lure of too much debt in the early stages...

When you start your venture, you tend to go aggressive in your early enthusiasm. This typically means taking on a higher debt. This can be dangerous for a variety of reasons. Firstly, early stage businesses tend to get debt at a higher cost. The servicing of the debt adds an additional burden to your cash flows as you need to use up your uncertain inflows to service your certain outflows. This argument also extends to your personal debt. Taking a mortgage loan or a car loan can always wait till your business stabilizes. Credit cards can be quite enticing but remember you end up paying 3% per month. Such costs are best avoided in the initial stages. More importantly, if you have any high cost debt like personal loans ensure that they are repaid before you embark on your venture.

So what Vivek needs to do is to get the simple rules of personal financial planning right.

• He needs to ensure that his high cost debts are first paid off.
• Secondly, he needs to take adequate insurance at least to cover risk to life and health.
• Thirdly, he must be passionate about front-ending his revenues and ensure that cash flows into the business.
• Last, but not the least, Vivek must put a lot of focus on managing costs at low levels.

After all, prudent financial planning and cost management can go a long way in giving your business a much better chance of success.
Source : Money control