Managing Finance For A New Venture

Managing Finance For A New Venture

Prof.Shobhit Aggarwal, Associate Professor, Finance and Accounting Area, IIM Udaipur, 0

What is the most important thing for having a successful start-up? Good product or service? Great marketing skills? Exceptional technological superiority? The answer varies sharply based on whether you ask someone who is planning to start their own venture or someone who has been running a venture already for some time. While a person planning on starting a venture is focusing his/her energies on only ensuring good product or marketing skills, a person already running a venture understands that managing the cash-flows well is the difference between the venture surviving or not surviving the first few years.

The key issue in most new ventures is having a limited amount of cash and slow cash collections, especially in the initial years. And if yours is a venture with low gross margins (revenue per unit – variable cost per unit), the threat of survival is that much larger for you. Often, start-ups with great products or services and decent marketing skills fail since they find it hard to survive until the venture becomes profitable on a cash-basis.

Every new venture requires some basic cash flow management system in place before they make their first expenditure. The system is not about having high-end cash-flow management software or dedicated finance personnel managing your finance. It is about following a simple set of rules you design for yourself and your business. Here are a few good practices that may help.

• Maintain separate business and personal accounts. Not only does it help you maintain discipline over funds dedicated for business and for personal use, but it also helps send the signal to a potential customer that yours is a professionally run business. Additionally, you can keep a clear tab of business expenses which will help at the end of the year when you have to do your taxes.

• Forecast all your sales, cash collections, and all possible expenditures you can think of for at least up to a year. Project a weekly or fortnightly cash-flow statement for the entire time period. This will clearly tell you when your cash position would be most strained and help you plan for it. Take a pessimistic scenario while making these projections to ensure that a sudden shock does
not put an extreme strain on your venture. This is extremely critical for businesses that are seasonal in nature.

• Ensure that you have a source of finance (bank loan or investor funding) secured for the weeks when you expect the cash requirements to be the highest. Rely more on equity financing in the first few years as this will not put a personal liability on you and allow you to be flexible in decision-making.

• Maintain a cash balance to cover the need for the next three months and keep a tab on how much longer your current cash can sustain the business without the need for new financing. Start looking for new financing 2-3 months before you actually need it.

• Try and reduce the fixed expenses as much as possible. Work with the lowest possible fixed expense structure possible. This includes salaries. If you can pay your key employees with a mix of cash and stock options (or equity in the company), it will save you valuable cash.

• Do not worry overly about diluting your equity while reducing your fixed expenses and securing sources of finance. Remember that 20% of a successful company is worth far more than 100% of an unsuccessful one.

• Review all your finances periodically. Set aside a few hours every month to examine all your revenues, cash collections, and expenditures. Be on the lookout for any potential issues and for opportunities to reduce expenditures or expand the business. This includes a review of all customers who still have to pay cash for your services and a review of all expenditures that your business makes.

• Focus on scalability. A business model which allows you to expand quickly when needed is essential. Keep this in mind while choosing your customer acquisition processes and your delivery mechanisms. You need a system that can run with minimum human intervention. If your presence is mandatory in ensuring delivery of the product/service or if managing the existing customers takes the bulk of your time, your venture has scalability issues that need to be resolved as soon as possible.

• Remember to keep a strict personal budget and stick to it. You do not want a situation where you are forced to withdraw more money from the business than planned or where you have to invest your savings into the business over the planned amount. Extracting cash from the business creates a direct survivability concern for the venture. At the same time, being forced to invest personal savings into the venture to keep it running reduces your personal flexibility and the time you can wait before the business becomes profitable on a cash-basis.