We regularly hear of start-ups and small business going bust so much so that a certain study conducted in the US reports that almost 80% to 90% of them fail just because of the failure to manage cash.
A business enterprise may have all the products, revenues or profits in the world but without the ability to generate cash and manage cash burn, it is bound to fail.
Here below are some common areas of cash mismanagement at most start ups and handy tips on how to avoid them.
Lack of clear plan to monetize – Many startups especially the ones in tech space do not have a clear plan of how they are going to generate cash i.e. monetize the offerings. There are many backers in the VC-PE space for unique and scalable tech offerings for considerable period without monetization. However, each such backer is ultimately interested in the plan to generate cash. Even with those who have plans, the plans are away from reality or lack sufficient traction and/or proven assumptions for over a reasonable period.
Clear and specific plant to monetize should be one of the most
important item of any start up after Product offering.
Geographic Expansion – Startups end up undertaking geographic expansion in their quest to become bigger and thereby ending up with higher cash burn. Resources, Infrastructure are added in newer geography without understanding the profitability, economics and cash generation capacity of the existing geographies. Scale of geography, resources, infrastructure is confused with the scalability of generating cash.
Ideal rule of geographic expansion should be twice the present number of geography at half the resources and infrastructure. E.g. if you are in 1 geography, do not expand to more than 2 at a go. Do not add more than half of what you have built in the first geography. Only pre-condition should be, current geography able to generate, manage its own cash.
Straying from the Core – Teams at start ups are always full of ideas and adjacent opportunities around the initial core proposition. With a sense of creating back ups to avoid failures, start ups end up burning cash across multiple priorities. Such experiments or propositions should be done from positive cash generated through customers and not from investor funds.
The funds from investors should be utilized in the most frugal way possible for the core proposition for which it has been provided. You need one unique and differentiating proposition that can become your cash cow before you experiment on other things. Focus, focus, focus. Priority, priority, priority.
Overheads, Administrative Expenses – Securing investor funds, Start ups end up adding unsustainable overheads and administrative expenses. E.g. Corporate office, recruiting for jobs where a fulltime resource is not required and other Non revenue generating, non revenue supporting resources etc.
Cost of Customer Acquisition and LTV – Often, significant customer acquisition costs (mostly in the form of temporary consumer discounts, partner/employee incentives, marketing) are incurred and justified against Life Time Value that can be generated from the continuously returning or retained customer. It is extremely important to differentiate and refine unit economics based on data of returning/retained customers versus those dropping out. Similarly, sales or operations productivity with and without incentives should be analyzed to arrive at its efficacy.
If the customers are buying your products/services for discounts and not due to any differentiation, uniqueness of the product/service itself, this will not last. Similarly, if your sales and operations deliver results with consistent and unsustainable incentives but not otherwise, you have not figured out your Sales and Operations model.
Copy cats without real uniqueness or differentiation – There are startups who copy the western world ideas and replicate them in emerging markets. These start ups can only last if they create real uniqueness, differentiation in their offering – either in their product or in the way they service their customers. Else, all the scale and size achieved through discounts, incentives, marketing powered by investor money will be up for grab by the originals. Originals will perfect their model, develop their cash cows, prove their profitability and cash generation ability before coming to kill the copy cats.
Virtually every start-up has undertaken employee lay offs in the last 3 years. This results into temporary yet a very time and attitude testing phase for every impacted employee. The consequences have wide reaching adverse impact on the mental-physical-social-career outcomes for the impacted employees.
The onus of avoiding such an impact lies with the Employer (Leadership Team), Board (Investor/Governance), Employee, Government, etc.
Here are some suggestions, signals that can be considered by different stakeholders to minimise, ease or avoid the impact –
-Negotiate “Termination for Convenience/Redundancy” clause for 6 months since, this is a reasonable time to secure another employment in most cases.
-Negotiate a minimum service period (say 2-3 years) during which ‘Termination for Convenience’ cannot be invoked.
-Seek information on a monthly basis if the Company has paid the Statutory dues in time i.e. PF, TDS, Service Tax, Excise etc. (Many Leadership Teams make conscious choices to delay these payments to keep the ship running in the hope of securing funds and/or turning around the company at the cost of interest/penalty payable.
-Look for signs of projects underway to automate repetitive work. Look for up-skilling yourself to move up the ladder.
-Look for signs if you are productively employed and delivering value to the company many times more than what you get paid for. Self-realization is the best way to prepare.
-Undertake part-time, week-end work to build alternate sources of income, employment.
Employer (Leadership/Management Team)
-Should keep an open mind with respect to some of the above, listed under the Employees category.
-Share at the beginning of each quarter with wider organization, if the Company is ‘sufficiently funded’ on its own management capability to cover the next 6 month’s salary bill. Any dependency on current or prospective investors to infuse funds linked to variety of negotiations, conditions and uncertainties should be clearly avoided to determine ‘sufficiently funded’.
-Employment for Fixed term
– Sign up employees for limited period employment (say 1 or 2 years). This will allow Employees to plan their next move in advance. Ideally, any renewal of such employment should be concluded 3 months in before the end of term.
-Consider pay cuts distributed over large number of employees as against loss of jobs for some. Important to determine if the lay-offs are temporary or permanent before deciding on the approach. It may also be worth to build a policy for voluntary employee contribution to a contingency fund to support the affected employees.
-HR along with Line Managers should systematically work with potential employers where the Employees can be re-deployed. This work is required to be done much in advance of a potential lay off’s.
-HR along with Line Managers should run programs to up-skill laid off employees, help update their resumes, provide references and recommendations, to minimize the impact.
-Keep an open mind with some of the above listed under the Employee and Employer category.
-Share at the beginning of each quarter with the Leadership/Management Team if the Investors are committed to infusing funds with or without specific reasonable conditions to cover salary obligations for the next 6 months. Independent Director’s role is critical in these matters, to avoid subjectivity.
-Repose faith or otherwise (in very clear terms), in the ability of Leadership/Management Team at the beginning of such quarter. Something on the lines of 1st instance of lack of faith equals to early warning and 2nd continuous instance of lack of faith indicating need for change. Again, the role of the Independent Director is of critical importance.
-Both mentioned above could be considered for documentation in the Board meeting.
-Facilitate enabling policy environment to all or most of the items listed above under the category of Employer, Employer, Board.
-Re-define the role, remuneration, appointment and removal procedure of an Independent Director at Start-ups. Include and integrate the concept of Employee Director (one who will make sure, the Company takes the right decision at the right time with adequate/proper planning to avoid, minimising the work force reduction and/or its impact including redressal mechanism.
-Facilitating policy to withdraw (at least portion) from P.F., Pensions etc. in case of impacted employees. Facilitating policy to provide re-scheduling/deferring of EMIs up to 3-6 months subject to reasonable terms & conditions.
If all stakeholders come together to become open, transparent, flexible and most importantly emphatic and improve their planning, all the above is possible.
Remember, for start ups to succeed and create wealth, it will have to be a multiplier of
Value X Values
If Employees, Management deliver Value and every one practices Values, Start-ups will succeed and wealth will be created.
The idea was simple, “Professional Entrepreneurs”. Balancing the maverick persona of the entrepreneur with the dependability of the professional manager to develop new approaches to business and problem solving for a changing world.
Most businesses and their approach to problem solving were developed for a different time, far removed from the one we live and work in today. The overall strategy for problem solving and growth was fairly simple and it did work, surprisingly well actually. That is, until the mid 90s when globalisation and major advances in technology, mobility and access to capital transformed the business landscape making it far more disruptive, unpredictable and dynamic. This effect has increased exponentially over time and it is just the beginning. As we look to the future, jobs will not come with a definitive to do list or qualification criteria. Rather they will come with the challenge of continuously anticipating, adapting and evolving in emerging scenarios and changes in external environment.
The brand we created had to tell this story. We decided to develop a complete corporate package right from our visual corporate identity and stationery to our website/blog. In addition to capturing these seemingly contradictory forces, we also wanted to creatively interpret our story.
The graphic designer we worked with came up with several options. While most were visually appealing, frustratingly they seemed to miss that sense of balance capturing the assertiveness of the bull with the subtlety of the monk. However, after several meetings and graphical versions, we finally had a logo. combining an impactful line drawing for the bull with the subtle nose-eye impressions for the monk acted perfectly as visual metaphors for both objects.
Further developing this concept, we chose from several colour palettes, from yellow-saffron, green-blue hues to our final selection of a solid grey for the bull combined with a dynamic bright yellow for the monk shape. As for the typography, we selected an easy to read sans serif, Work Sans and handwritten Redressed for our stationery.
The website/blog was another story entirely. It was the perfect opportunity for us to build on our initial brand idea and tell our story in greater detail. It needed to be different, elegant, concise and creative. The designer chose to focus on “Change”, creating several brand taglines from, “adapting to change”, "leveraging change" through to the final, “lead with change”.
Instead of using clichéd slideshows and corporate videos, visual metaphors were created with particle animation effects. Beginning with the homepage, the designer used a particle box which gets disturbed when hovered over with a mouse but animates back to retain its original shape. This translated our idea perfectly of how businesses need to be resilient working with change rather than trying to fight it. The about page builds on this visual with a particle slideshow with a bull, monk and a kite. We kept the adaptive particle effect where the particles adjust to let the mouse pointer through but still animate back to their original shape.