We live in an era where self-made billionaire entrepreneurs have become role models for an entire generation of youngsters. The stories of Steve Jobs’ and Mark Zuckerberg’s ingenuity, verve and passion have become legendary, and have given birth to legions of bootstrapping entrepreneurs with stars in their eyes.
But there is one thing that these iconic entrepreneurs have proved, it is that while money can never be a substitute for passion, it is like oxygen for an enterprise. Without enough of it, the best business model would flounder and fail. Therefore, it is essential to have good financial planning - however un-glamorous it may seem - from day one.
Intelligent financial planning means being prepared, disciplined and smart. It ensures less financial risks (think unforeseen expenses, taxes or penalties), less wastage (unnecessary money spent to fix holes that should never have existed), and better growth prospects (organized cash management means fewer messes and quicker decisions).
Here are some tips for early-stage start-ups to manage their finances better:
Read the rule-book: The rules governing different kinds of start-ups are different. For example, starting a design agency and a fast food establishment will require specific sets of permissions and licenses from various government departments, which in turn costs money. Getting acquainted with these rules and regulations is vital.
Sole proprietorship versus partnership: There are various formats for registering your start-up. Some may prefer a proprietorship model, others a private company or partnership firm or co-operative, and so on. Each of these also comes with its own registration and other costs. Comprehensive guides to understanding the main nuances of starting a business in India can be found here and here.
Check your finances: Once you’ve navigated the legal and bureaucratic tangles, take a realistic view of your business’s asset and liability position. Assets would include bank balance, immovable property (land, buildings), movable property (vehicles, machines), investments in the name of the firm (shares, insurance policies, mutual funds etc.), and any other receivable. Your assets represent the money you have.
Then, look at the money you’ll need – to cover liabilities and expenses and to fund your enterprise’s growth. Liabilities include loans and any other payables you may incur. Your expenses are the short, medium and long-term costs for keeping your business running.
Assess what these likely expenses are, and whether your savings and/or cash flows are likely to cover them. And finally, decided how you’re going to raise the money needed for growth – will you take a bank loan or funding from an angel or venture investor? Remember, when you raise money, you either have to pay interest on it, or part with your assets (such as your share in the company). More on this in the last point, ‘New ways to grow’.
Maintain proper accounts: Your financial accounts hold up a mirror to your enterprise by giving you a clear position of your assets and liabilities. Hence, it is important to keep your accounts properly, transparently and diligently.
In the initial days, some entrepreneurs may use diaries or Excel sheets to keep track of accounts, but these may prove inadequate for a growing business. There are accounting software tools out there for small businesses – some free, some paid. Consider going in for one, or better yet, get hold of an accountant who has prior experience in working with start-ups. Failing to maintain accounts properly could result in a headache tomorrow, when the business scales up and you need to get in line with mandatory accounting norms.
Protect yourself from tax bombs: If you think PAN, TAN and VAT respectively mean a cooking vessel, sunburn and a tub, you need a crash course in business taxes. India still has a large number of tax-related processes, and while it is certainly desirable for the entrepreneur to fully educate herself in these processes, the alternative is to get a qualified tax advisor who will guide you through this minefield.
Not only will this help you stay ahead of your tax liabilities, your advisor can also spot opportunities for you to save tax with some smart financial maneuvering. Every rupee spent on tax can be channeled into your start-up’s growth…and over a period of time, that could amount to a lot of money!
Take your banker into confidence: It is important for entrepreneurs to see banks as more than giant ATMs. Your bank could be a valuable partner for your enterprise. With the government stressing on priority sector lending to small and medium enterprises (among other segments), banks are required to extend credit to promising firms.
Cultivating an honest and transparent relationship with your bank can have advantages for you – such as timely credit at affordable rates, a higher overdraft limit, ease in documentation and more.
Spend smart: Outsource whatever you can, rent what you can’t afford to buy, hire people on contract basis rather than full-time. These are some established tricks and tips to keeping costs low. Try and get innovative in your efforts to save money.
New ways to grow: Taking a business to the next level of growth requires a funding game-plan. There are many options out there for an entrepreneur to raise money – bank loans, venture capital, a new partner, crowd-funding, etc. Each of these comes with unique repercussions. It might be a good idea for you to establish your funding strategy at the very beginning. When do you anticipate you’ll need to raise the first round of funds? What is the amount you’ll need? Are you willing to pay a high-interest loan or do you prefer to part with some of your founders’ equity? These are all questions that will come up sooner or later.
The last rule of smart finance management is to have one year’s worth of expenses in the bank. If all else fails, you’ll have something to keep you afloat. And if all goes well, the motivation to never touch that money should keep you energized and focused on the future.