By Bhasker Assoldekar*
Exactly a year ago a businessman from Margao came to me and said, “I have been running this very successful business since last four years but God knows why there seems to be no money left in company bank account. I have defaulted in payments and at this rate could be forced to sell or close the business.”
I requested him to take me to his office to understand his problem better and as we drove there my doubts started gaining grounds. As I took my seat in his trendy and posh office my lurking fears were slowly but surely coming true. I probed further to confirm my doubts. He had spent substantial part of bank sanctioned working capital loan in refurbishing his office. It was a classic case of mismanagement of bank sanctioned loans.
Many enterprises with successfully designed business models have gone out of existence due to mismanagement of cash and cash flows. For an entrepreneur there are various sources of funds available. Some of the common sources are savings, family, friends, banks, financial institutions, venture capitalists etc. But there is always a cost attached to the capital. A business person has to decide whom to take it from, how much and when, based on the cost implications and other factors. And one has to be extra careful when one decides to buy depreciating assets which may not play a direct role in the business activity.
If entrepreneurs were to be asked what is the most important area of concern during the initial years they would invariably say it is finance. And it is much more acute when a technocrat with no finance or economic background ventures to start an enterprise.
An entrepreneur need not spend time in trying to achieve skills in accounting and book keeping or expertise in preparation of financial statements. It is best left to accountants. However it is extremely essential for an entrepreneur to learn to read them from accounting and financial perspective and understand the implications. Interpretation of financial numbers and the necessary action in the right direction is the key to the success of an enterprise. Aspects such as valuation, raising funds, type of money needed, the cost of money etc., should be understood for a timely action.
While all this is related to the early stages finance is required throughout the growth of the enterprise. It is identical to watering of a sapling during the growth of a tree and then monitoring it till it starts bearing fruits.
The most hassle free method of generating money is by ‘boot strapping’ a term used to describe an entrepreneur who consciously tries to use his own savings to start without external financial help. It is important to understand that this form of starting an enterprise requires a very different mindset. The need for a mindset is because the entrepreneur has to run the enterprise, sustain it in a boot strap mode, has to focus on keeping costs absolutely low, not make any wrong investments by taking external loans, keep a close watch on expenses, compromise on the lifestyle that one enjoys specially if one has worked in senior positions in the companies with all sorts of perks.
Personally I have preferred this mode at the cost of certain lifestyle sacrifices. However for scale up and growth one would always need money from outside source. And one should opt for it judiciously if opportunities for growth are higher. Estimating money requirements would involve preparing monthly cash flows. The cash flows would clearly indicate the revenues getting generated out of sales with the corresponding expenditures during the month. This would help in planning cash flows both in the event of surplus or shortfall. Whatever money that one takes from outside sources, the enterprise should be able to service it adequately which should be substantiated by the financial projections- failing which there should be a rethink. While it may seem rational to accept that the presence of paying customers is what is going to assure cash in-flow it is equally true that if one does not have cash on hand, it may not be possible to service the customers. During such times, one has to still maintain office, pay utilities, pay salaries and wages and other consumable bills including electricity and phone bills etc.
An entrepreneur has to therefore constantly keep track of his finances and ensure that surplus cash is present in the system which is available to fund current and future needs of the enterprise. It would not be prudent to use bank sanctioned working capital to buy depreciating assets like a car. Instead preserve as much of it to buy the necessary raw materials, packing materials etc. This way he will neither get into a cash trap nor a debt trap like my friend from Margao.
*The author is M.Sc.(Tech), MBA(IIMA), managing director of Vibha Natural Products Ltd., Mumbai.