Startup need to forsee the cash crunch
I happened to visit young entrepreneur friend of mine yesterday. Last time I had met him few months back, he was bubbling with lot of ideas and had plans to expand at the speed of light.
His fitness franchise model was doing good and centres were being opened in major cities at the rate of one per month. He sure seemed to be expanding at fast speed. However, when I met him again, yesterday after a gap of 6 month, he seemed to be depressed. In his expansion drive, he lost track of cash flow and now is facing major cash crunch. What is worse, nor has he approached any bank or investor and neither he has any business plan ready.
Cash is the fuel that drives business, and many financial analysts consider the condition of a company’s cash flow to be one of the most important indicators of that business’s financial health. After all, a well-managed flow of cash–like a strong heart–is usually indicative of a healthy business, while poorly managed cash flow, or a weak heart, can cause problems that affect the entire business.
Cash flow management requires more than just a financial fix. It requires a holistic approach that focuses on making a company’s entire supply chain operate more efficiently. After all, the faster goods move from seller to buyer, the faster sellers can be paid. And while working with a bank to open a line of credit or amending an existing financial instrument can certainly help, the only real way to address a cash flow problem is to take a holistic, long-term view of the issue.
Fixing a cash flow problem requires companies to examine and improve the three key flows of commerce: goods, information and funds.
Though my young entrepreneur friend has financial statements of last 2 years that too audited, however, both years, business is shown to run in loss. And the reason for the same is that though actually the business made reasonable profit from first year itself, however loss was shown on advice of his CA to help avoid paying taxes. Unfortunately, Banks or any lender wants to lend the money only to profit making business and not a loss making enterprise.
My advise to young startups:
1- Please show profit in your business as it helps attract funding from Bank and investors as and when you may need it. Don’t avoid showing profit just to minimize your tax liability. That is foolish idea in the long run.
2- If your business is growing, even if you may not need money in present times, however it is advisable to keep dialogue open with potential investor and bankers. Also keep updating your financial and business plan. You don’t know when you may need cash for short term, mid-term or long terms.
3- Don’t blindly depend upon your CA rather learn a little bit about balance sheet, best practices in cash flow management and about legal compliances and taxation etc.