THE 7 DEADLY SINS

It’s sad but true – more often than not you’re the biggest enemy of your start-up. Yes, you factored in competition and recession , but do you realize that financial mismanagement is responsible for the demise of more than one brilliant business idea . If you are guilty of this you could be headed for disaster.

POOR CASH CONTROL
Indian entrepreneurs are often not at the top of their cash situation. They have little idea of inflows & outflows often the seeds of troubles are sown even before the start up has taken off. Launched with minimal capital, the debt component of most small start-ups is much higher than the equity. In fact, Indian companies could have debt equity ratios as high as 3:1 As a result most enterprises can raise very little fresh debt even before they begin operations. The second problem is usually underestimation of expenses like import & transport costs .Having eaten into their working capital to meet these , entrepreneurs end up taking loans when they are finally ready to launch. The third major cause for poor liquidity is that entrepreneurs overestimate their receivables – money they are likely to receive from clients , vendors , and so on .

NO ‘PLAN B’ IN SIGHT
“ Entrepreneurs tend to function with assumptions that are far too optimistic “ You might make plans expecting your first large order to come in, within the first three month of launching , but it may materialize only after six months. On the other hand , the three month credit you were hoping for from your supplier may be withheld down to just one month. Such over – optimistic predictions mean poor liquidity. Always assume the worst, and have plan B ready . “Instead of concrete plans on how to meet future cash needs, many entrepreneurs move ahead with the assumption that they will somehow manage to raise loans , this is often their undoing . The best idea is to plan for the worst and work towards the best possible scenario.

THROWING IT AROUND
The surest sign of trouble is when you consistently overshoot your budget. Excessive investment in infrastructure is one way of wasting money . “You end up creating too many overhead.”

DELAYING DEBT
There is something called good timing most entrepreneurs wait till the kitty is empty before they raise money . The thing to do is borrow when you are still in funds. When you are not under pressure to get out of liquidity crunch, Your bargaining power improves and you won’t accept loans at unfavorable rates. The key to raising debt lies in accurate forecasting of your cash needs.

BORROWING BLIND
Entrepreneurs are often guilty of borrowing less or more than they should and this is mainly because they just don’t know how creditworthy they are. They miscalculate potential earnings and overlook expenses. This can mean smaller than expected loans. Ignorance about business potential, poor planning often sees entrepreneurs tapping the unorganized money market at exorbitant rate.

LEAVING LENDERS OUT
Tell your lenders exactly what’s happening in your enterprise. The more informed they are about your business, the more confidence they have in you .You will find them much more receptive when you ask for loans during a cash crunch .The bottom line is that you need to treat your lender as your partner.

THIN RESERVES
Don’t splurge as soon as the profits start trickling in, your business is always going to need cash, especially when you want to expand. Plough back your earnings to keep a ready reserve for your contingencies. These then are the seven deadly sins of cash management and committing them doesn’t simply mean hardship it may lead straight to financial hell.

- Ambikesh Singh, MBA(III Sem)