Some Key Aspects of Managing Startup Finances

DK-Statup

Building a company from ground up is one of the most difficult things you can attempt. So many things can go wrong – and so many usually do – that you need to ensure you do not make common mistakes. These jottings will deal with some common mistakes startups make, and simple ways of avoiding them.

Manage Your Cash Flow
This is something that many startups do not pay attention to, and hence, they find themselves soon running out of cash. Having raised funds to get going after considerable cajoling and persuading, promoters are horrified when they find they have run through their cash much earlier than expected. Hence, it is important to get professional advice on building and implementing a simple but robust 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 exercise is complete only when the plan has been updated and forecast revised based on actual figures and developments. All numbers should be validated by Finance Department and variations should be explained and understood. Inflows should be conservatively estimated, while outflows should be 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, and you will find unexpected demands arising all the time. 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 down 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 and Airbnb and similar facilities will help keep your costs down during 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 to them.

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 such a phase if it happens. 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 should 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.

Closing Remark
I know from my experience that many crises startups face are avoidable, and happen due to inadequate attention to managing finances. This is more so when the 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.