The Randstad Workmonitor survey states that 83% of the Indian workforce is interested in entrepreneurship as compared to 53% worldwide. India, a country of entrepreneurs is rapidly emerging as a hub for tech based start-ups. Most entrepreneurs tend to have strong domain knowledge, but financial tips can give them the extra edge they need to succeed. Here are and few quick and easy ways to start planning today.
There is an old saying that "Cash is King" that entrepreneurs need to be mindful of. No matter how fantastic be the business model of the company, book profits are not enough, it needs to ensure sufficient cash flow to pay its suppliers, employees etc to survive. If it fails to secure cash, the business will eventually fail. While a start up can have negative cash flow from the business, it would need to secure funds from investors, but investors would run out of patience if the business fails to generate cash.
It is important for entrepreneurs to secure the financing for the business. While entrepreneurs do invest in their own funds, in order to scale up the business external investors may be needed. This financing can be in the form of debt or equity, both of which have their pros and cons. In case the business has physical assets and the cash flows of the business are stable, debt financing can be an option. However for many start ups, especially in the areas of Technology where the assets of the company are mostly intangible like intellectual property, equity financing would be more appropriate. Here entrepreneurs need to be mindful of valuation, and should hire independent valuation experts for this exercise.
Another old adage "Time is Money" is something entrepreneurs need to be mindful of. They will find themselves short of time and need to assess whether an issue is worth spending their time on. Assigning a value on their time can help them assess how much time they should invest in an activity, as well as arrive upon a delegation framework to help them with a quick turnaround time.
While an entrepreneur sets up a business to build wealth, it is important for them to recognise their dual roles, that of an investors as well as a full time CEO. The payoff for the first comes from the wealth generated from the business- read that as the valuation of the business. As the CEO, they need to remember to "Pay them-selves" as sustenance is important from the very first step. Ideally, this would amount to the money apportioned for the CEO hired for the business. It is essential to avoid basic financial lapses so that one can focus on building the business.
Track inflow, outflow
At the initial stages of launching a business, an entrepreneur needs to keep a careful track of how the business model evolves and how funds are allocated. In short, "track revenues and spending" until you arrive upon a consistent pattern. One needs to keep a careful track of inflows and outflows to ensure balanced cash flows as well. An intelligent investment would be building a proper MIS and accounting software, in addition to hiring finance professionals.
It is common for new players entering the landscape to burn cash in order to grow fast, which is why they will need to give a detailed thought to expenses. It is important to have a long run perspective and have a scalable business model, with limited fixed costs. This can be achieved by various tactical elements like opting for co-working spaces or an optimal model for fixed vs variable pay for employees.
While new entrants may enthusiastically anticipate success, they should be ready for failure. It is estimated that about 90% of start-ups fail in the first five years of starting their business. Thankfully, in India the stigma attached to failure in business has gone away. However, a failure can be hard to rebound from and they should ensure that a business failure doesn't cause financial ruin. This can be avoided by not staking their entire fortune on the business and by investing portions of their wealth in manner that helps them bounce back.
As we mentioned above, entrepreneurs should diversify their wealth in order to shield themselves from the ups and downs of their business. For this they need to have a robust asset allocation plan, depending on their age and risk tolerance. They should invest in equities, debt and real estate. In order to diversify they should seek to invest in equities in sectors other than the sector of their start up. Also when drawing up their asset allocation plan it is important to remember that the wealth in their firm is a part of their equity investment. For an entrepreneur whose age is 40, approximately 60% of their asset allocation should be in equities. For a young entrepreneur whose age is 25, upto 80% of their allocation can be in equities. In order to achieve this objective, consider utilising the services of a financial advisor.
Lastly an entrepreneur setting up a start up needs to set financial goals, while some of this will undoubtedly be part of their vision, like to be a unicorn within five years. However, for an actionable plan will also have milestones to achieve this goal, against which progress can be tracked. Similarly for their personal wealth as well, an entrepreneur needs milestones against which progress can be measured.
(The writer is CEO Stock Broking, Karvy)