India has the 2nd largest startup ecosystem in the world which is expected to grow 10-12% year on year basis. According to NASSCOM, more than 1,200 startups were born in 2018 alone and the government is promoting and improving the infrastructure with schemes like startup India. 90% of the startups fail in the first five years. Apart from many reasons like the poor business model and bad management, lack of financial management ranks as one of the primary reasons for startup failures in the last few years.

According to the Berkshire Hathaway survey, only 65% ​​of entrepreneurs have an active involvement with the finances of their company. Almost 27% of small business owners do not know how much they made in early 2019.

Following are important tips that every entrepreneur must follow to keep its startup financially secure-

1. Cashflow Control

Cashflow control is the first step for financial planning. Even if today’s founder does not like rigid management, inflow, and outflow of cash must be processed and taken care of.

Maintaining proper channels for cash flow helps in avoiding frauds and also lead to better management of funds. Moreover, it helps in analyzing the key spending areas and the low spending areas. It leading to efficient cash utilization. Usually, founders fall in the trap of overspending and running out of funds which can be controlled if appropriate channels are created for the flow of cash.

As per a study by Business Insider, 82% of the startups and small businesses face cash flow problems.

2. Record all financial transactions

Cash control offers a simplified view of past expenditures. It needs to be used as a starting point to develop an even more efficient financial management strategy. Any and all movements in company finances should be recorded – including transfers between company accounts.

Lack of proper bookkeeping or having no record of transactions leads to create financial disturbance in the startup. Following are the advantages of recording all financial transactions

  • Having a better cash flow
  • Performing Business Evaluation
  • Ease of Paying Taxes
  • Developing Performance Charts
  • Ease of Reporting to Investors

3. Contingency fund

A contingency fund is a cash or other assets reserved to address unforeseen circumstances or losses in a business. The role of the contingency fund is to improve a company's financial stability by developing a safety net that the firm can use for emergency needs. It can also be used to reduce the need to take out high-interest loans, such as credit cards, to cover unexpected expenses.

It can be difficult for a startup to get the limited funds they have and keep them in reserve. Most of the financial experts recommend making the contingency fund worth 3 to 6 months of operating expenses. Founders can start it off by 1-month operating expenses and gradually increase it to the recommended levels.

4. Long term projections

Good financial control requires long-term planning of both the business and the market situation. This practice allows aligning the investment to make the business/startup run with the revenue it will generate, avoiding potential problems with working capital in the future.

Therefore, it is essential to know the operational cycle of the company’s activities and to analyze the foreseeable expenses in each activity, such as acquisition, stocking, manufacture, sale, and payment, to plan the future expenses accordingly.

5. Financial consultants

Founders may lack knowledge of accounting and financial management practices, which leads to finance mismanagements in the tenure of a startup. It is also hard for a startup to hire a full-time financial expert, so a consultant can provide all the knowledge an expert may possess while keeping the costs in check.

Financial consultants can be chartered accountants or experienced professionals in the field of finance. They guide the team in organizing the financial aspects of future plans, correcting any errors in finance management, and solving all the financial doubts. Consultants also help by assuring the cash is being effectively utilized and there is no cash crunch in the near future.

Apart from the financial security, success in an entrepreneurial venture is dependent on many factors – the business idea, understanding and tackling the regulatory environment, processes and procedures, and building and managing one’s organization through the heady, but tough, early phase of any organization.

It is very difficult for an entrepreneur to have all the knowledge and skills, hence it is highly recommended for the entrepreneur to choose a structured programme to learn. IIM Calcutta has recently launched Start-Up Readiness, Growth and Execution (SURGE): An Entrepreneurship Programme in association with Hughes Global Education. This programme has been designed keeping in mind the complexities of an entrepreneurial journey. The programme will be an entrepreneurship toolkit programme as a six-month programme culminating in a campus visit where participants submit their business plans and the best of them will be reviewed by a panel of judges including at least one venture capitalist.