Financial tips for entrepreneurs to become successful

Generating a profit is one of the most challenging tasks an entrepreneur must complete in order to grow and survive in the competitive business world. You must know the right ways to manage and utilize your capital as it is the backbone of your startup. Thus, here are some financial tips for entrepreneurs, that I have found out from my decade long experience of guiding investors to incur maximum return from their investment. I have shared these tips by answering some common financial questions asked by entrepreneurs.

1. Can you share a tip for effective cash flow management?

There are many good reasons why entrepreneurs should know about effective cash flow management. The biggest reason is that running out of money is one of the reasons why businesses fold shortly after launch. If cash is king, cash flow is the kingdom.

The most effective tip for effective cash management would be to know exactly when your business will break even. Knowing the point at which you’ll break even won’t impact your cash flow. Then, what good does it do, you may ask? When you know your break-even date and actively work for it, you have a chase-able goal. A ready-made target is what drives a business. Actively forecasting where your cash needs to go in order for you to reach that goal is half the job done.

2. How to decide whether to go for venture funding or take a loan from the bank?

Most venture funding routes do not have an immediate pay-out for the investor. This is how cash outflow is limited for the business that receives venture funding, while at the same time the business gets cash and time to grow.

Any loan, bank or otherwise, that has immediate repayment attached to it means your new business will have to bear that repayment expense. Interest rates may be attractive, but it is still a loan. Do you want to carry that burden early on?

If your cash flows do not have room to repay (even after a 1/2-year moratorium), then it is better to explore venture funding routes, at least early on.

3. What should an entrepreneur do with his earning once his startup yields the profit?

If your business generates profit after paying everybody including you (salary), congratulations! Because this is the most difficult job and most entrepreneurs fail to create businesses that generate cash profit.

You must have noticed the word ‘cash profit’. This is the cash that the business has generated and not a product of smart accounting.

Once you generate a profit, you should measure what is the profit margin your business has yielded. Next, you should look at the scalability of the business. If the profit can go up, you should invest more in your business so that sales can expand. This will automatically tell you which are the areas you may have to invest to generate an even higher profit margin.

4. Which books must an entrepreneur read to improve financial intelligence?

A few insightful books are:

• The $100 Startup: Fire Your Boss, Do What You Love and Work Better To Live More – Chris Guillebeau
• Zero to One: Note on Start-Ups, or How to Build the Future – Peter Thiel and Blake Masters
• Measure What Matters – John Doerr
• The Hard Thing About Hard Thing: Building a Business When There Are No Easy Answers – Ben Horowitz
• Start With Why: How Great Leaders Inspire Everyone To Take Action –  Simon Sinek
• Be Obsessed or Be Average – Grant Cardone
• What I Learned Losing a Million Dollars –  Brendan Moynihan and Jim Paul
• Growing a Business – Paul Hawkin

5. What are some common financial mistakes that are made by first-time entrepreneurs?

• Doing it alone: It is almost impossible to build a scalable business with 1-2 people.
• Taking advice from wrong people: Take inputs from qualified experts. Do not take start-up business management ideas from people who have never hit the startup trail.
• Hiring skilled but expensive people: Human resource management is more about paying the right money to the right person. There is no point in hiring extremely skilled people if they come at great cost.
• Too much effort in product development but not enough on sales: Marketing and sales are what brings revenue. If you spend 80% of your effort and resources on product development, there will be nothing left for marketing. Clients wouldn’t know you have a great product if you never bring out the solution soon enough.
• Too small market: Niche products or solutions are great, but your company’s growth will quickly hit a wall if the market you’re targeting is too minute and small.

6. What are some avoidable spendings at the early stage of a startup?

• Excessive rent for the office
• Social media spending if your business is largely offline
• Fixed salary employees (with no target/incentive aligned payment structure),
• First-class travel

These are few of the areas where flab can be cut during the initial years of a start-up. Many spend a lot of money on employee parties and gatherings. This should be reduced. Celebrations should be for achieving some concrete goal, not otherwise.

7. Do you know a trick for effective financial planning?

Keeping business and personal expenses separate is important. Never mix the two. Also, as an entrepreneur, your personal finances, should be in good shape. This means the leader cannot worry about something like, ‘how to pay EMI for next month’s car or home loan?’ if they are building a top-quality business. At last, it’s necessary to save 12-18 months of monthly budget requirement, and do not forget or cut out insurance if you hit a cash crunch.