An expanding business offers the potential for numerous growth opportunities –
- Employees benefit from – Increased earning + promotions+ recognition.
- Customers benefit from – Expanded product & services.
- Owners benefit from – Increased profit potential.
- Society benefits from – New job being created.
- Country benefits from – Increased investment of foreign investors.
Although business growth is rewarding, it may test founder’s financial management skill & financial resources. Financial management involves all the activities that enable a company –
- To obtain capital for growth
- Allocate resources efficiently
- Maximize the income potential of the business activity
- Monitor results through accounting documents.
Such management requires a well-written, comprehensive financial management plan clearly outlining the assets, debts and the current and future profit potential of your business.
“Financial Management is the operational Activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation.” – Joseph Massie.
As per general surveys around 98% of the startups fail because of their business model; around 87% startups failures are driven by poor management, around 91% failures are because of financial issues. All the activities related to any business model leads to a final outcome – money. And management of this outcome is responsible for how any business will fare in long term.
As discussed with Jaze (changed name), founder of a brilliant startup (not disclosing the name), “We burnt our limited funds initially just to capture the market volume of our competitors by giving excessive discounts. But suddenly a stage came where we had to reduce the percentage of discounts to make our business model sustainable; hence we lose a large market share that was attached with us because of high discounts only. So, we had to identify the actual market volume and developed the market capturing strategies just for that volume base.”
“Leadership is working with goals and vision; management is working with objectives.” – Russel Honore
Here is FS labs Analysis on startup financial failure-
Liquidity Failure –
Liquidity means how quickly you can get your hands on your cash. In simpler standings, liquidity is to get your money whenever you need it. In case of startups, where the business model keeps fluctuating as per several factors like – market need, competitors’ strategies and business model need etc, financial liquidity becomes quite important to ensure the long term sustainability.
- What would happen if the cash outflow and inflow are not balanced?
- What if the funds are not distributed as per the need of activities?
- What if the funds are not managed as per the actual cost estimation?
The major reason of startup financial failure is the liquidity crisis. Inexperienced entrepreneurs block major portion of their funds in few activities and hence the requirement in critical activities gets affected. The situation can easily be avoided by proper planning of funds utilization against the requirements.
- Forecasting of upcoming potential market demand combined with the market capturing strategies and competitors penetration helps in determining the cash in and out flow management.
- The need of funds should be aligned with the expansion plan of business model to avoid the upcoming liquidity crisis. In case of limited funds, the business model should remain in the liquidity limits benchmarked for that industry.
- Flow of cash should be monitored regularly to avoid the cash problem.
Profitability Failure –
Profitability means how much profit you earn against the expenditure for that profit margin. It’s a metric that is used to access a business ability to generate earnings as compared with its expenses and other relevant costs incurred during a specific period of time. Again profitability is not a 1 day or 2 year journey. Sound planning for achieving breakeven well before your competitors will give you an edge. It will ensure that you have seen the light at the end of tunnel earlier than others. In long term your profit margins will be higher than others. In case of startups, the profit margins might not be a concern for short term targets of infiltrating the competitors market, but essential for long term survival.
- What would happen if the expenditure on each of the activity is not optimum?
- What would happen if the selling price is not aligned with the overall actual cost?
- What if the profit margin is not optimized?
One of the major tactics of startup industry is to try to cut down profit margins at initial stage to capture the market. If the competitors are strong enough to stand against your strategies, the startup business model starts struggling before survival.
- Proper controlling of cost to ensure the optimum operational cost is essential to generate the best fit selling price.
- Aligning the sales strategies to avoid the losses is a good practice to manage the cash flow.
- The profit margin should be kept within the allowable values determined by fixed and variable cost combinations.
Financial Management Failure –
Financial management is the identification of cost including activities, planning of cash flow, monitoring and control of cost baselines and altering the baselines as per actual need. In case of startups, where all the resources are limited, financial management decides the success probability.
- What if the cost is not being utilized as per the defined baselines?
- What if the cost baselines need to be redefined as per fluctuating needs?
- What if there is no control on the funds flow?
There are two aspects for better financial management –
Persistence: In a growing business, financial resources are often viewed as the major factor limiting growth potential. There are two methods of improving financial base:
(1) Grow gradually and allow profits to fund additional growth and
(2) seek outside funds (i.e., debt or equity funding).
Both approaches will consume time and energy, and one will experience some rejections. This is where persistence is important.
Balance: The financial and operational aspects of growth must be balanced when you expand your business. During a growth phase, for example, the marketing function of the business may extend beyond the business’s financial capacity to sustain growth. To avoid this dilemma, devise policies to balance the operational functions of the business with the financial aspects of growth. Growth should be attempted only in businesses already profitable. To attain profit potential, a balance must be maintained between asset and liability items that are on the balance sheet and operating items that are on the expense and income reports.
Inexperienced founders with little knowledge about the sanctity & proper routing of funds often grow impatient and seldom look for maintaining balance in financial and operational aspects. Startups face the issue of financial managerial skills. Proper monitoring and control on each of the cost vertical helps in achieving long and short term targets.
Wish you luck for your startup. Stay tuned with FS Labs for more updates.