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How can Startups Avoid Financial Ruin

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Most of the closures are mainly related to financial mismanagement. Lets take a look at how a startup can avoid financial breakdown

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How can Startups Avoid Financial Ruin

  1. 1. Avoid Financial Ruin in Startups
  2. 2. Contents • Fall of Startups • How to to avoid financial breakdown – Ignoring Emergency Funds – Insufficient Fixed Capital – Working capital is crucial – Prepare a clear Revenue Model – Pay attention to the cash flows – Generate Profits & Not Sales – Do Not Use Short-Term Funds For Long-Term Purposes – Keep In Mind Various Financial Risks • Conclusion
  3. 3. Fall of Startups • Startups have been a trending concept in the present business world • In 2015, there was a significant increase in the number of startups in every possible field • However in 2016 startups witnessed a reverse trend with a fall in the number of new startups • Many startups are shutting shop too • Decrease in the inflow of funds too has resulted in some startups merging with older & larger ventures • Most of the closures are mainly related to financial mismanagement • Budding entrepreneurs should pay equal attention to financial aspects of the startup as they do to technological, marketing, valuation & fundraising aspects
  4. 4. Lets take a look at how a startup can avoid financial breakdown
  5. 5. Ignoring Emergency Funds • Many startup entrepreneurs do not keep backup plans • Funds for emergencies are also not kept aside • To enable a backup plan to function properly, it is equally important to keep sufficient funds aside to fund those solutions • Unprofessional handling of financial affairs involving huge sums could lead to losses • Losses in finance of startups may prevent you from getting future monetary help from institutions • Keeping emergency funds can help put off foreclosure from clients who defaulted on payments • Emergency funds also be used to compensate for losses suffered from damaged or missing stock until the flow of income steadies & gives stability to the company.
  6. 6. Insufficient Fixed Capital • Having insufficient operating funds has been a common lethal mistake for many failed businesses • Businesses are forced to close down as money needed is often underestimated • Assuming unrealistic incoming revenues from sales is a common mistake • Ascertain the amount of money your business will require for starting as well for staying in business • Enough funds should be kept aside to cover costs until sales can eventually pay for these costs
  7. 7. Crucial Working capital • Working capital requirement is not clearly understood as opposed to fixed capital requirements • Many ventures are starved of working capital for sustaining daily operations • A large percentage of closures are due to a shortage of working capital • Working capital is mainly required for: – Purchasing materials & maintaining inventories (in case of organizations engaged in manufacturing / trading); – Meeting day-to-day operational expenses – Investing in your customers where goods & services are sold on credit
  8. 8. Clear Revenue Model • It is important to pay attention to financials & the revenue model • Without a strong idea of how & from where the revenues are going to be created, the venture would be a non-starter • Remember businesses cannot be run for long on investors’ money alone • The business should essentially generate enough revenues to at least meet operational costs
  9. 9. Pay attention to the cash flows • It is important to note, there is no connection between the profit that a business earns & the bank balance it possesses • The connection between profit & bank balance is inverse, i.e. Higher the profit, lower the bank balance • Profit may be generated mainly due to deployment of bank money • If you started storing your bank money, it would be a matter of time before you could stop making a profit • Fixed capital is required periodic cots like employee salaries • Remember, successful businesses stand on 2 pillars: – The ability to generate profit & – The ability to manage cash flow effectively
  10. 10. Generate Profits & Not Sales • Entrepreneurs should keep in mind that the aim of running a business is not to generate sales but to make profit • Selling is a means towards an end & the end is to make a decent profit • Chances of an investor further financing your business only impressed by sales volume are slim • While developing a business plan there should be complete clarity on how the business is going to make profits
  11. 11. Do Not Use Short-Term Funds For Long-Term Purposes • Startups must ensure that long-term funds are reserved for long-term purposes • Short-term funds should be used for short-term purposes only • Never ever use short-term funds for long-term purposes • If start-ups pay heed to the finance management aspect of their business it will go a long way towards sustaining their venture & making it a success
  12. 12. Keep In Mind Various Financial Risks • Financial risks do not vanish once your business is up & running • A number of situations can adversely affect the cash flows of operating ventures – Customers can default on your invoices (credit risk) – Cost of your raw materials could skyrocket (commodity price risk) – A strengthening dollar can reduce the net profits from your international customers likewise, a weakening dollar can raise costs of your offshore manufacturing operations (exchange rate risk) – Increase in interest rates could raise the cost of your working capital (interest rate risk) – A plunge in the value of stocks or real estate you pledged as collateral could cause your bank to cut your credit lines (asset price risk)
  13. 13. Conclusion • For startups, the biggest financial risk stems from not having a Plan B • Many types of capital-intensive businesses do require significant startup funding • Odds of finding an investor willing to take a huge risk on you are slim being a rookie entrepreneur • It may be more practical to start a business requiring a modest amount of initial funding • You may also want to have two separate business plans: – one for growing the business if you happen to succeed at finding an investor – one for bootstrapping the business if you have to go it alone • Entrepreneurs quickly learn that it is impossible to raise money when you need it and everybody wants to give you money when you do not need it • One way to lessen financial & other risks is to take funding when available & keep it in reserve for a rainy day