Most of the startup owners are in fact, way too worried about financial management and dread heavy accounting and taxation regulations. But knowing the finances is key to successful business management. This, in particular, is valid when most of the startups are bootstrapped and have several debts to be equally managed with care. So what are the various sources of debts for startups?
- Personal sum borrowed from friends and family
- Loans from banks or financial institutions
- Incubators and Accelerators
- Startup contests
- Selling assets
These are some of the most sought after fund raising techniques adopted by startups which are also debts and need to be repaid. Technically, any amount that needs to be paid back within a stipulated time with various clauses is known to be debt. As long as the startup is able to manage debt, it gets easier for it to move forward with better scaling plans and also to seize better opportunities. But how can this be managed well? Here are few takeaways for it.
- Plan the expenditure: Though there might be few occasions when there is an unplanned expense, a startup must ensure that such situations are rare. Unplanned expenses take a direct dig at budgeting and thus in the end, mess the entire forecasting. It is extremely important that as a startup entrepreneur though every expense might seem justifiable it is smarter to adjust within the lowest possible monetary option.
- Income lesser than expense: It is a given that in the initial years the income might not increase and even a break-even might appear like a dream. But what becomes crucial is to observe and understand why the startup is not making profits. The money should at least start rotating in the cash-profit cycle eventually else it can lead to more borrowing of funds which means more debt to be repaid. A clear business plan is mandatory that portrays the first three years of operation. This will help in curbing unnecessary increase of debts.
- Look and manage: It is absolutely not advisable that every time there is an unexpected expense, you straight away borrow money. Look for some sensible options and adjust within your existing capacity rather than stretching the financial status.
- Cost cutting: Most of the corporates hate the term ‘cost cut’ but what it also implies is prioritising the expenses and knowing what practically is needed for the business. This exercise will also help in curbing any kind of financial waste that can occur due to lack of knowledge and evidence.
- Seek help: This is very much advised for student entrepreneurs or tech entrepreneurs who lack the financial understanding and skill. You can seek professional help from expert debt advisors who will be able to guide appropriately at various stages of your business. But this is optional since as startup, you might not be willing to or be able to afford a professional.
- Restructure: Make a clear monthly expenditure plan and stick to it. But at any point in time if you feel that the budget is not all that precise and needs to be readjusted to suit the dynamic needs of your startup, feel free to alter it accordingly. The budget also needs to be reworked based on the growth and scale of your business operations.
- Get right accounting practices: Differentiate your accounts receivables from payables and keep a firm control over them. If you have clearly segregated departments then allocate budget based on departments. It will be easy to manage it that way. Try and make use of underlying resources than acquiring new ones.
- Keep a tab: Repayment of loans on time is crucial for the goodwill of your startup. Split the expenses and keep repayment as one of the top five expenses every month or every quarter. Make repaying aptly a habit and stay away from the commotion of unplanned expenditure.
Managing debts smartly is an investment for the long-term. As much as spending wisely is an art borrowing less also is an art. Money is after all money!