Startups need to focus on the Unsexy – It can make or break them

Cash is King! People say. That’s the more true in the startup world than anywhere else. Having cash in your bank account ensures that you can survive and maybe become a Unicorn.
Most founders focus on the problem of getting more cash but if they also focus on how they are spending the money they can ensure that they are not overly dependent on external funds.
One key tool to monitor your cash is doing bank reconciliations on a regular basis. This is a very boring,time consuming and completely unsexy job which requires hours of sitting and comparing transactions in your back account with your books of accounts. However its an essential control which can be implemented without any technology and ensures that you as a founder know where is your money going and all the money that is due to you has actually hit your bank account.
“Show me the money” said Tom Cruise in Jerry Maguire and I feel a lot of startups just get happy with seeing the money by way or orders, transactions etc. However, until the money actually hits your bank its an illusion.
If founders only focus on the illusion then they are setting themselves up to die as a venture cannot survive without cash. Its like walking towards a mirage in a in a desert.
Bank reconciliations also ensure you know if you are over paying/double paying or if someone is cheating you. I have seen large companies loosing millions on due to over payments to vendors. They can take that hit but a startup already starving for cash cannot. 
So make sure you ask your accounting team to give you a status of bank reconciliations every week and if they are not doing it get to start. It maybe the one thing that helps you keep above water till your next round of funding.

Think Business Continuity in a Start-up

Events like 9/11 and tsunami hitting Japan after the Tohoku Earthquake in April 2011 have emphasised the importance of planning for business continuity and each new event has forced companies to think about new aspects when planning for business continuity. For example 9/11 made companies sit up and think about offsite storage of key documents and stopping of manufacturing of specialised chips in Japan after the tsunami made companies relook at their supply chains and critical vendors.

Ensuring that you can run your business and service customers after a business disruption is critical. The business disruptions don’t have to as big as a magnitude 9 earthquake however its impact on the business can be similar, especially in a Start-up enterprise.

In the initial phases when you are developing your product and working with limited customers it is important to ensure you have thought about things that can go wrong and disrupt your business. Examples of these could be:-

– disagreements between co-founders or some co-founders leaving (case of )
– leaving of a critical employee
– unable to hire the right skill sets when it is time to scale up
– crashing of computer/harddisk with key piece of code/website
– unexpected competition from new or established players
– A key vendor backing out

The founders should spend time to review their business practices, infrastructure and business relationships to ensure they are aware of any critical points of failure (which in a start-up maybe all!!!!) and look at possible backup plans they can formulate before hand to ensure they don’t too many crisis to manage. They could even have someone from the outside do a quick review to ensure they are covered all angles.

Risk Management in a Start-up

So you thought of a great idea and have decided to start a new venture. There are almost a million articles on the internet about how to start up, launch your product, acquire customer, raise money etc. I know, because I have been thinking about doing something on my own for about 6 months or more and have read enough of these articles.

Being an auditor, I was interested to learn about things that can go wrong and found this one articles (5 Common Startup Mistakes That WIll Sink You Later) on mistakes that start-ups make. Except for the last point about building the right processes and controls all other topics are have been covered to death by most other articles that I read.

Ensuring you have the right processes and controls is key and should be tackled as soon as the start-up moves ahead with the idea and starts to invest money into the venture. I know its not something everyone has time to focus on. Especially when, you have to focus on developing the product, building the website, marketing the product, looking for customers and investors, hiring people and million others things that need to be done for your venture to succeed. 

Also, why should you think about boring things like processes and controls? Especially when starting something on your own was about breaking free and not worrying about them in the first case! Well, having controls and good processes are as important as having a good foundation for your house. If the foundation is not right you would have problems in future which will be very expensive to fix or may take the whole house down. 

When I was thinking of writing on this topic I wanted to find out the reasons start-ups fail, but didn’t get too much information about that other than they had something which the market did not want. Exploring this more, in most established companies there are lots of controls around launching new products to ensure the company does not lose money on a new product. If some of the start-ups had similar controls maybe the success rates could have been higher.

Another factor to consider is management of money, not everyone is good at managing it. Well ask Madoff if you don’t believe me.

So as a start-up when you have limited funds, management of money becomes even more important, you may not have funds to hire a CFO (and you don’t need to), but you need to have good processes and controls to know where money is being spent and who can spend the money.
Similarly there are others areas where good processes and controls can help to ensure the foundation for the business is solid are :-

  • There is no revenue leakage i.e. you are making sure all the work/product/services done for the customer is getting converted into rupees or seen as a value add by the customer. This is one of the most important control in even the most mature organisations who struggle to ensure customers are being billed for everything. For a start-up this is even more important as in the initial phases we are struggling for every rupee.
  • Structuring the company, looking at regulatory requirements, taxes etc. For example there is recent news that Flipkart maybe in breach of Rs. 1400 on FEMA (Refer Something like this if upheld can cause real problems when you want to sell your stake or go in for an IPO.
  • Controlling the vendors 
  • Ensuring compliance’s are met on an ongoing basis
  • Controls on information and customer data
  • Working Capital Management
  • etc. etc.

I hope I have been able to give some insight about why it is important to ensure you have the right foundation for your venture by putting in a good structure and control principals as soon as possible. These can then be expanded/evolved as the company grows.

The best option is to think about these and try and implement it yourself. You feel you need help you could work with any number of consulting firms to help you with these if you are well funded and able to spend big dollars or you could with freelance consultants like me to help you navigate these risks.