How not to end up with your first startup

9financialtips for Sri Lankan startups

By Manosh Kulasena

Startups have already become the buzzword among Sri Lankan youth entrepreneurs. In line with the Global startup boom, home-grown tech companies are also disrupting the Sri Lankan business landscape. 

The success of startups and SME sectors would be paramount importance to fuel Sri Lankan economic growth. Globally, there are several startups transformed into large corporations and some of them are larger than Sri Lankan GDP. Therefore, your next big idea may be the game changer for Sri Lanka.

It is obvious that for a lucrative startup the main ingredient is an “idea”. Novel Ideas will develop innovative products or services that would meet the needs of the marketplace. We all have read success stories of global and local startups, but no one talks about failed startups; those which did not make their way to newsfeeds. 

One of the main reasons for failure is lack of financial planning and management. One such bitter defeat at the early stage of your jounrey might evaporate the entrepreneurial spirit for the rest of the life.  Many Sri Lankan entrepreneurs possess sound domain expertise in the core product, but lack of financial literacy paves the way to collapse of their startup.

This article provides nine key financial tips for Sri Lankan startups, which will enable you to launch your startup fruitfully or offer a cushion in case of a downfall. Thus, you could live another day for a new battle. 

Convert your big idea into realistic numbers

An entrepreneur could spark a game-changing idea anytime, but always remember to convert that idea into a simple but yet realistic business plan in an excel sheet. Formulate realistic assumptions, especially in terms of capital required and demand for your product/service. 

Data gathered during your market research will become valuable during this exercise. Start with revenue, then list down all types of forecasted fixed and variable expenses. You have to sketch at least a three--year business plan in line with your product/market development plans.

Ask a friend with the market or financial expertise, to challenge your assumptions on the proposed business model. Based on the review, you could amend your business plan to be more competitive and viable in the eyes of funding partners or move to a fresh idea without incurring losses. At the end of this exercise, you will realise that your idea is not just a dream but something realistic and valuable. This confidence booster at the pre-startup stage will amplify your efforts and passion.

Options to attract initial capital

At this stage, you are planning to keep the first step of your success story through product development stage. Required capital investment will depend on the business plan, nature of product, infrastructure, operating model, etc.

Investing your hard-earned savings

You could invest your savings to develop the prototype of your product. Prototype plays a pivotal role to draw investors to your venture. Don’t be afraid to invest your own money, because at this moment you only have the confidence in your big idea. After all, it’s your baby! But point to note here is, if the required amount of capital is quite high, do not fund 100% of the capital from your personal finance. This is a common mistake among many startups. 

In case of a show-stopper, your personal finance will get hampered and it could create ripple effects on your family members. Establish an emergency fund to continue your lifestyle in the event of a failure. Startups are vulnerable to close down after its first year of operation. This is an inherent nature/risk in any startup. Lesser bleeding will keep you alive to formulate a fresh startup at a later date. Hence it is utmost important not to use your entire personal wealth to fuel your dream venture.

Borrowing money from family/friends

This is a popular method in obtaining seed capital in Sri Lanka due to constraints in raising capital from financial institutions or high net worth individuals. However, it is important to note that you carry the same funding risk profile similar to a self-funded startup.  Therefore, it is recommended to have an open dialogue with your friend about risk and rewards attached to their investment.

Investing in a startup should not be compared to investing surplus cash in a fixed deposit. If your friends are unable to understand dynamics in startup investments, better to educate them at the outset. Otherwise the famous slogan “Nayata deemen mudalath mithurath dekama nathiwe” (when you lend to a friend, you might lose both money and friendship) will come into play.  Conscious funding decisions will strengthen your relationships and enhance your credit worthiness, even in the case of business failure. Further still, you could approach them for your next big idea.

2.3 Financial institutions, venture capitalist, high net worth individuals

If you are required to raise large amounts of capital to ignite your company, it is obvious that you need to search for deep pockets. Banks, angel investors and high net worth individuals are going to be your prospective funding partners. In Sri Lankan startup ecosystem, there are several active funding partners.

However, they will analyse your business idea deeply and critically compared to your beloved family and friends. This is where, it is important to have a strong, comprehensive business plan covering sales, marketing, technical and finance with a strong and passionate management team. You have to present the prototype of the product to convince prospective investors. It is ideal if your product is customer ready at this stage. Simultaneously, ensure your product has a competitive advantage with trade secrets, patents or trademarks. If your product could be easily replicated or reversed engineered, the venture capitalist will not be able to recover their investment. It is also critical to understand the role and investors’ involvement in decision making and business operations to uphold a healthy relationship in the long run.

Understand the difference between cash vs profit

Lots of entrepreneurs believe cash and profit are identical. But that is not the truth. Cash is like oxygen in your body and profit is like muscles in the body. A human cannot live without oxygen, similarly a business cannot survive without positive cash flows in the medium and long-term. 

Keep a track of all your cash inflows and outflows to ensure that you know from where cash got generated and where it got drained. This visibility will immensely help you to cut down unwanted and unproductive expenses.

Maintain a separate bank account for your business and personal finance

Another common mistake is where entrepreneurs maintain only one bank account for both personal and business transactions. It is essential to understand one of the basic concepts in Accounting; that is “entity concept”. In simple terms, business and owner are two separate entities. Businesses could fail, but owners should not.

When you channel all your business and personal transactions from your personal account, you are unable to track your business and personal expenses. Draw that fine line otherwise, your personal savings will diminish due to losses in your business. You may have to invest in your business again to revive it, but have a separate account, so that you can monitor the performance of your business clearly and this will enable you to make sound business decisions.

Invest prudently in big-ticket items – fixed assets

When you talk about a business, what naturally comes to your mind is an office complex located in the heart of Colombo with modern ambience and full-fledged staff. But remember startups are standing on the other side of the spectrum. If you analyse popular global startups, they are lean in their owned asset base but still record massive return on Assets. 

Working from home would be an ideal way to reduce your fixed cost or lease out premises for a shorter tenure until you test the waters. Some startups have paid key money and signed up for long-term building leases. Sadly, lease tenure exceeds the life of the startup.

Seek the possibility to rent office equipment such as computers, printers and furniture during this phase. Lower fixed costs will enable you to become more agile in decision making and it will reduce your business failure cost and provides some breathing space till the next big idea comes.

Have a simple accounting system

Businessmen have a habit of carrying numbers in their head as per their own accounting standards. It is sad to see that many SMEs/startups continue to run loss-making ventures assuming it generates sufficient cash and profits. This scenario is evident when you have surplus cash in personal accounts or easy access to credit. You will keep on pouring your surplus personal finance into this loss-making business without rectifying the root cause. Finally, this will result in huge personal and credit card loans.

You don’t have to recruit a full-fledged accountant to monitor the dashboard of your company. You could write down all your income and expenses in an excel sheet. Track down your receivables for timely collections and keep a tab on loan repayments to avoid surcharges on interest expenses. Once your business case is proven, you must recruit an accountant to monitor the result of your hard work and improve performance in future. 

Staff cost 

Human resource plays a pivotal role in any business, whether it is a startup or a long established blue chip. Being a startup, it is vital to delivering the core product/service with a lesser headcount. At the beginning, it is obvious that entrepreneur performs most of the roles in a company ranging from security officer to the chairman. Which is a fun part of your startup despite the business results. 

Try to deploy part-timers or freelancers in your payroll instead of full-time employees. You could recruit your key personnel as full-time employees or give them a profit share of the company. These tips will help you to reduce fixed staff costs during the incubator stage. 

Invest in marketing and sales 

Remember, if you want your startup to be like Usain Bolt in the marketplace, you should invest in calves of the sprinter. Invest in marketing and sales to announce your market presence and to strengthen your revenue flows. From above tips, now you have easily saved or minimised big ticket outflows and unwanted expenses. These savings could channel towards product development and marketing/sales functions. 

Monitor results against your budgets

Always compare your actual results with your budgeted figures to see, whether you are in line with original plans. The finance budget is your compass in your business journey. When there is a deviation take a pause and rectify deviations to avoid major overhauls or sudden death of the business. Being in a startup you will obviously invest more time in technical and sales aspects. This is where you need to have a co-founder to share the workload. One must spend some time to check financial performance dashboard (cash flow, profits, receivables, variances, etc.) to detect warning signals in your business vehicle. 

Conclusion

Financial literacy among Sri Lankan entrepreneurs is the key for successful startups and SME segments. Transforming your business from startup to small/medium business would require a different set of financial tips but the core remains the same. Application of the above financial tips will help you to attract prospective investors. Even during a collapse of the business, your exit cost is low which will enable you to try another startup in future. Therefore, don’t end up your entrepreneurial spirit even if your first startup failed because now you have reserved some fuel for your next big idea. 

[The writer is a member of the Chartered Institute of Management Accountants (UK) and member of the Institute of Chartered Accountants of Sri Lanka and holds B.Sc. Accounting (special) degree awarded by University of Sri Jayewardenepura. He is the Chief Architect at ‘Mani talks Money’. He can be reached via [email protected].]