Finance basics for Startups

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Generally, I come across entrepreneurs who have a pretty good product/service and same has been accepted by the market and they are quiet doing well. The start-up is hustling or striving day and night to make the product/service better and better, they are continuously pulling feedback from customers, continuously troubleshooting, continuously doing trial and error run’s, continuously removing glitches, people in the office are moving two or fro speaking to various team members. You completely forget to sip the coffee you ordered and the coffee loses its steam as you and your team are in continuous hustle.

You start getting people on board, you start telling them the game plan, the vision, the mission, the product grounds and all the necessary info. Hence with all these things done and you carry on same over a period of time and thus your start-up comes out exceptionally and your customers are happy. Now with all these done you want to see the finance part of it, you call your accountant to submit the till date reports and expense and income heads, but your accountant makes excuses and delays to submit the details you asked for

Finally, your accountant brings in whatever he was able to manage to maintain and you see some spreadsheets, workings, Debit/Credit, tons and tons of numbers under various heads few negative numbers, few positive numbers and a whole lot of pile of data made available to you regard to which you lack the knowledge and your accountant lacks the same to showcase the actual picture as the accountant failed to maintain a proper track.

You the Start-up tracks towards your destined goal was laid out well , but you had paid more attention on getting the COAL for your engine to run and less attention towards how the coal was utilized? You raved the engine to the fullest and attached various WAGONS to your train , but you did not pause at the required PIT-STOPS. Your speed and throttle was excellent but you paid less attention to the various GEARS working and checking was the gears pulling your wagons? and was it headed in the right direction? You were lost among the cheers from the SPECTATORS for YOU AND YOUR TEAM FOR THE SHOW and ignored the BACK STAGE SET-UP TEAM.

Basic componants

  1. The laid down tracks are your STRATEGY
  2. The coal is your MONEY/CASH FLOW
  3. The wagons are your various DEPARTMENTS AND SUB-PRODUCTS.
  4. The whole Train is your EMPIRE,
  5. The Pit stops are the REVIEWING INTERVALS of facts and figures.
  6. The Gears are various things RUNNING INSIDE YOU, the way the gears move the same way train moves , The way you move the empire follows , you stop the empire stops, are you outputting a positive vibe for your fellow men to feel?
  7. The Spectators are your CUSTOMERS, You and your team is your PRODUCT/SERVICE, The Back stage set-up is your FINANCE AND THE ANCILLARY TEAM.

 You paid attention to Finance only at the initial time of raising necessary capital for your product or service, but later on you ignored it all way down the line, that’s the reason I mentioned in the previous para “Paid more attention on getting the COAL for your engine to run and less attention towards how the coal was utilized”.

  • You hired the most talented people for your product/service development but you compromised on the people type at your finance level or admin level or other ancillary services and failed to make people accountable in their respective department, failed to collect or ask for reports facts or figures, failed to keep a check on their work and had no clue as to what was that guy/girl sitting in finance team, Housekeeping team, admin team was actually doing? while you and your product/service team were hustling!

Following are few basic questions: 

  1. How much Cost am I incurring over the product/service?

Make a clear classification of Fixed and Variable cost:

Fixed cost is those that you need to bear even if you close your business for a specified period or you make zero sales viz Rent expense.

Variable cost is those that vary depending on your operation of your business and are not fixed, viz consumption of raw materials is based on your production, Daily labor charges which are based on your Hours of Production

  1. How much return will I be making on the Capital deployed in my business?

Your return on the capital Invested in your business should be more than the Risk free return provided by various Instruments or bonds, here is an eg:

Currently let’s assume by keeping a Fixed deposit with Zero risk in it for 1 year in Bank of Rs.1000 I get a return of 8% on it , which means by end of next year I’ll make Rs.80 [1000*8%]

So Your business should be making a return more than 8% and not just a slightly above 8% but at least 15% or more in order to cover the Inflation part of it as well.

If your business shows a return less than 8%, then its better you make a Fixed Deposit and relax at your home and get better return than your business, instead of taking risk or hustling and making less than 8%.  

  1. What’s the velocity of my cash flow?

It deals with how soon the money you invested in your stock or raw materials converts in to product and same transforms to sales and comes back to you in form of cash again, The faster the conversion the better the cash flow you have.

  1. What Internal Process within my company should I have?

Do streamline process in your business though its small in scale, because the Business you dream of working in future with your projected 100 million revenues, should start aligning to that projected image of working culture from the 1st day of business and from your 1st rupee of revenue earned or 1st rupee of expense incurred, System should be set-up and necessary tweaks to be made as empire enlarges and as you set-base and go on improvising the system.

  1. How often should I make team meeting with Finance and ancillary teams?

Ask for accountability from your various departments and various reports from your business staff to give a sense to your staff that, You the entrepreneur is vigilant and you are indeed in charge of the upcoming empire and expect the pillars to be strong and embedded. Make a fixed date or interval viz monthly or quarterly and ask the team for their respective reports to be sent to you without you asking for it on that stipulated date.

My dear start-up entrepreneur your throttle at the product/service level is very much important but same amount of importance need to be given to your finance as well. Finance is your blood flow which keeps on flowing and should never be stopped or clotted. You as entrepreneur should control the FLOW and not BLEED and not let your empire die.

 I shall be posting in more detail on above mentioned topics on my upcoming Blogs or Articles or may be a Video on topics viz Finance, Start-up process streamline, Accounting and Book-keeping , Internal Financial Controls, Start-up essentials, Finance modeling, Capital Composition and other topics which fall under the said arena.

Contributed by Akshay K. Bhandari (CA finalist) having great passion and interest towards entrepreneurship and startups related areas.

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