Finance Management for Entrepreneurs..A Rope Walk

The thought of letting go a secure job in pursuit of your dreams, will most likely give you an emotional high as an entrepreneur.

However it is usually after two or three months into your entrepreneurial journey that you realise that your financial responsibilities get heavier by every month. You are not only responsible to find a stable source to keep your personal finance intact, but you are also responsible to keep your business finance “sound” (read it as barely “above water”).

This blog is my attempt to pass on the advantage of hindsight I have now for the benefit of those budding first generation entrepreneurs and/or those who start with very little initial investment.

We all know that any new venture provides immense challenges. What does not occur when you begin is that you will face challenges continuously and you will need to fight challenges relentlessly over at least a few years, if not more. Hence, it becomes almost imperative that you are not alone in it. Choose a trusted bunch of people who will be with you, come what may (much easier said, but thats the way it is) and start your entrepreneurial venture with their total involvement and commitment. Along with some good suggestions for finance management, they will also lend moral support when the chips are down.

Managing finance is a significant challenge. More importantly, it is JUST one of the significant challenges. The other challenges include nurturing your unique idea, marketing, managing suppliers, managing HR and administration, retaining employees, landing the first deal, compliance to legal requirements and on and on…

It makes a lot of sense to split responsibilities such that, each one of you can FIGHT challenges that you take. Nevertheless, always make decisions (big or small) on consensus. In my experience, democratic decision process saves you from falling flat, though it may restrict you from being aggressive. Often for a small company, wrong decisions can be potentially fatal. So safety always wins over aggression.

Expenses are real, Income is virtual

- From the day you start functioning, you are either incurring expenses or committing to incur expenses. E.g. Getting a land line means, signing up for regular expense. Entering into rental agreements, recruiting staff all of it mean that you commit to spend every month.
However, you will take a few months (sometimes even a few years) before you have a firm income.
So you need to know in advance, how much you will spend every month and how much you will earn and when to cover for these costs.

Revenue Plan
The following questions become very important to be answered for your revenue plan.

1. Who will give me this revenue (the industry, potential customer if any)?
2. What will they buy from me ?
3. Why will they pay so much to me for what I provide ?
4. What is the time by which the revenue will be REALISED.?
5. Can I generate lead, identify need, position my solution, convince, get the purchase order, deliver, prove to customer that the delivery is complete, raise invoice, get them to process the entire invoice value and REALISE the revenue WITHIN the planned time frame ?
6. How much will be the NET revenue ? (Net revenue is invoice value minus tax deducted at source, penal charges if any)
7. What is the plan to sustain if this entire process mentioned above either slips or does not materialise?
8.Almost all start ups end up giving their product / service for free or at throw away for their first n number of customers, just to establish & prove their worth. Include this cost and time to your expense sheet.

Try to be realistic with a tilt towards pessimism to answer the above questions, for the closer you are to being accurate the better you are to tackle them when the situation actually unfolds.
Discuss your answers with people from industry to see how real you are. Information / feedback is worth its weight in gold for any entrepreneur.
Do not be critical of or discard anybody who plays the devils advocate. You need realistic answers and as much confirmation as possible that you can actually make the projected revenue in the projected time frame.
One thing is for real, you are most likely bound to over shoot your expense budget. So you better have your revenue projections as close to accurate as possible.

Expense Plan
Your expense budget must include two aspects. Accuracy and exhaustiveness.

For exhaustiveness,
1. Try to search and gather as many expense items as possible, to the extent that you are tired of searching for expense items.
2. Understand the nature of each expense item and accommodate that in your budget. For example, laptops are bought when a resource joins. However when a resource leaves and a new one joins, the laptop may be reused. Such a nature of expense must be accommodated in your expense budget.

For Accuracy
1. Gather practical cost data from market.
2. Utilise software tools such as spreadsheets to make a comprehensive expense calculation
3. Apply the nature of expense in spreadsheet
4. Do not discard decimals.
5. For assumption based budgets such as marketing travel / wining & dining expenses, discuss with subject matter experts (marketing head of the same industry) about the nature of your business and what you can reasonably expect.
5. Debate the expense sheets with your partners
6. Get trained accountants to verify the expense sheet and justify the cost to him and try to convince him.
7. Where costs are dependent on assumptions, note the assumption clearly so that when the actuals unfold you can update the budget based on the real experience.
8.Avoid the temptation of adding buffers to each budget item. It is better to add a single buffer at the end of the budget. The need is to get as accurate as possible to the real cost. You cannot afford to be slip away from actual cost on either side of it.

Once you have answers to the above questions, you will know the duration for which you will be spending without any revenue and this will also tell you approximately how much you will spend before your revenues start compensating for your expenses (at least partly).

You need to find a source to fund this expense until the revenue unfolds. We funded our fixed expenses through loan options. If you will take this route as well, while budgeting for working expenses it is important to include expected loan repayment schedules into expenses budget.

It makes good sense to give serious consideration to all sources of revenue at the beginning of a venture, to tide over the expenses. At the same time, care must be taken to ensure that the effort and attention involved in generating such alternate form of revenue does not derail the execution of your original business plan.

Choose your banker
It is important to choose a right bank for your organisation. The moment you start your business, you are starting to create a history of transactions, all of which get recorded in your bank statement. The banker you bank with is in the best position to judge your financial soundness, value your relationship and provide you benefits such as business loan / cash credit facilities in future. If your banker is sound, you will automatically get the maximum benefit. If not, your transaction history will provide limited value to you in future.
So check the corporate credit facilities, general credit policies (aggressive, safe etc) and other corporate banking facilities of the various banks you are eying and decide on your banker. It is important to check if the bank can give you references of their corporate customers similar to you, who have been banking with them for at least three years. Take the feedback of such corporate customer before deciding on your bank.
Facilities such as cheque pickup/delivery etc don’t count much in choosing the banker. At least we did not use such facilities much.

Once you start your business, it is all about trying to keep your actual expenditure as close as possible to your budget. You will find that almost on a day to day basis, you will find unforeseen expenses in spite of an exhaustive expense budgeting. Be prepared for it.

Question each expense as and when they appear. Also question what you loose if you don’t incur the expense. In many occasions, not incurring an expense can be damaging. So better to incur such expenses even if it hurts financially. Its a tough call some times. But take it.

Tackle the never ending cycle of cash flow

You need to know all your expenses in advance in order to ensure that you can provide for those when they occur. To achieve this, have a list of recurring expenses listed by date of month in which they recur. Example, salaries happen on 30th/31st of every month. Bill payments, loan EMIs occur around 5th of every month. So you will have a total of payables on each milestone.
This will give you the approximate value you need at specific milestones each month.

Your accountant can prepare a list of non-recurring expenses every month, for the forthcoming month. The combination of both will give you an idea of the amounts you need to have in your account at specific milestones of the coming month.

You need to prepare a list of POTENTIAL receivables with POTENTIAL date of receipt against each item in the list.

Important Note:In countries where service tax is levied, the customer pays a standard service tax, which your company is  supposed to receive and pay the service tax department. Ensure that the service tax collected is  not mistakenly included in your disposable income.

By matching the potential receivables with the real expenses, you will get an idea of your CASH FLOW position for the up-coming month.

Armed with the above information you need to do two things.

1. Plan to realise the potential receivables on or ahead of the POTENTIAL date of receipt
2. Priorities / adjust payables to ensure that payables fall within the available cash in bank on any given date.

Any short fall needs to offset by external debt and it is to arrange for this debt, that you need time and hence all the above planning ahead of the due date.

The following must be considered while arranging for debt.

1. The debt for cash flow management must be short term (in days). So you must have a visibility of an upcoming revenue which can quickly pay off this debt.
2. If there is no visibility of such an up coming revenue, then better to opt for long term debt with EMI facility. However you must try and keep such long term debt to minimum, as you are trying to cover for a revenue short fall and not funding a fixed expense.
3. It is better to have a permanent source for such short term debt financing. So choose one debt financier and have an arrangement for regular financing of shortfall. Cash credit facility from your banker is the best option. However, your banker may take a few years to know your ability to repay before they open up such facility for you.

In case there aren’t any external debt available consider the following options or a combination of it.
1. Quick loan from family and friends, which can be paid off by upcoming income.
2. Prioritise important payment. Request for time to clear payables with lower priority.
3. Negotiate for increased credit period at a slightly higher payout.

Some tips on payable prioritisation
1. Loan repayments and Regulatory payments usually take top priority
2. Junior staff salary takes priority over senior staff salary.
3. Director salary falls last in the priority list of salary payables.

NOTE: These are only short term fixes. Please do not forget that you need to make payments every month. So you must clear the months short fall the same month and plan for the next month. You must not let the payables accumulate as this will quickly spiral to an unbearable situation.

By now you would have figured out how important it is to earn revenues to cover your expenses every month. There is no real alternative to a consistent revenue source when it comes to helping you clear your expenses. Hence your real focus must be in generating consistent revenues.

Finance management is about keeping the cost low enough so that the fluctuating revenues can cover the cost. The trick is, the cost is constantly pushing upwards due to inflation, increasing salary payables and others. Revenue does not necessarily grow as cost grows. It is smart and prudent expenditure that can yield returns in future.

So corporate finance management is a constant rope walk. It is usually a full time activity. So if any one of your partners is an accountant or a commerce person, leave this job to him and leave him with it.

Strategy, marketing and corporate finance must not be handled by one individual. As a strategist, you must keep visualising without worrying about the current state of affairs. If your current state bothers you, you will stop dreaming and you company will have a curtailed vision.

Similarly as a sales and marketing head you will spend a lot on travelling and meeting potential customers without any corresponding revenue. If you are worried about the financial state, you will curtail your marketing expenditure, which will surely show in the future revenues.

So keep finance away from your strategist and your marketing Director.

As an entrepreneur, you must plan your finance consistently, demonstrate high levels of prudence in expenditure, aggressive strategies for invoice recovery. Consistent application of these three traits in tandem results in healthy financial position of your company.

Go walk your rope and have your share of cherished experiences.