By Mahesh Krishnamurthy
This subject takes me back to a real life story that I would like to share with my readers. Sometime in 2011, a friend of mine from Bangalore gave me a call asking for some urgent help in filing tax returns. He was running a very successful catering Startup business, averaging sales of over Rs 10 lakh per month. Since I was employed around that time, I guided him to another friend of mine to sort out issues with his tax returns and that ended our conversation.
Sometime in January 2016, I connected with that friend again, hoping to get some business from him as I had ventured on my own. It came as a big shock when he told me that his business was being wound-up. I asked him why and he explained. In one single statement: ‘I must say things went wrong, as there was no financial discipline, control and monitoring in place’. My friend never kept track of cash flow and slowly got into trouble.
This is what that seems to have happened:
- The organisation did not keep proper track of receivables and payables
- There was no proper method used to keep track of expenses
- Focus was on increasing business without looking into other parameters
Financial discipline needs to be understood from a broader prospect for startups. It includes a whole stream of activities that need close monitoring, and which have financial implication. Each activity /function needs to be disciplined and has financial implications. These include:
- Following the right processes
- Product development, manufacturing, services or as the case may be
- Go to market strategy
- Doing the routine stuff like validation, cash flow management, etc.
Financial discipline in business must not literally be read and understood as an authority to control. Definitely, not in a startup!
Forming an organisation is more about creating a value, solving a problem, creating employment, making a product, making mistakes, learning, and remaking. All this is going to cost money and when money is limited, it calls from using some prudence while deciding how to spend it.
The reality is that in startups, things and decisions keep changing every day based on learnings and market reality. However, even in extreme conditions maintaining balance and prudence is an important trait a founder must have. Unless a disciplined approach is adopted on usage of available funds by the founder, things will tend to go haywire.
Financial discipline in startups should not be construed as financial planning. These are two different terms.
Mahesh Krishnamurthy has over 25 years of work experience with various companies in finance and accounts, general management, funding, strategic planning and running SME businesses. His areas of expertise include management consultancy, mentoring, strategic business planning, business turnaround, Temp CFO services, turning family business to professional set up and exit strategy, due diligence, funding, debt restructuring & business process re-engineering.