By Mahesh Krishnamurthy
Finance is an important and integral part of any organisation including startups. In this series of articles, I propose to bring out some key elements which all entrepreneurs in startups need to know.
The first part of the series covers financial planning by startup founders. We will examine issues like: what is financial planning and why financial planning is required for a startup?
To put it in very simple words, financial planning is the best possible use of money that is available. It is very easy to say “the best possible use of funds available”, but to decide the right course of action in a startup environment, that too which is constantly changing based on day to day challenges, is a tough call. With limited fund availability it becomes very important for a startup founder to know his priorities and that is where financial planning becomes critical.
How should one go about implementing financial planning for a startup? The following must be on top of the agenda in the financial plan:
- Cost to test the startup idea
- Cost of product development
- Basic market study
- Salary for employees, of course do not hire unless
- Travel and staff welfare
Having made the plan, one must know the time frame available beyond which the founder cannot fund the startup anymore. As per a recent article in one of the world’s leading magazine, 29% of startups fail as they run out of cash either before funding or after funding; either way it is due to lack of financial planning. Considering all the above issues, following becomes very important:
- Time frame when the product will be ready
- Go-to market strategy and launch
- Revenue trickling into the system
This will help the startup founder to do financial planning and decide the timing as to when an investor needs to be approached and when equity needs dilution. It is also safely assumed that a typical startup will operate from home/hostel/rented place already being paid for hence the same is not being taken up for discussion.
By planning, the founder is quite clear and will be more relaxed as long as things proceed as per the plan – ironically, in nine out of ten cases this does not happen. Hence, it becomes very important to provide for necessary buffer in the plan to meet unforeseen challenges in funds. One can never do hundred percent planning with perfection; however, once a founder is mentally working on his plan, he also foresees the changes coming up in his plan.
This is when measuring a plan versus actual becomes a critical factor. This is where financial discipline becomes important. This we will discuss in the next article.
Coming up next week: Understanding financial discipline
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.