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. 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. Lets take a look at how a startup can
avoid financial breakdown
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. 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. 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. 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. 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. 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. 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. 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. 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
