Having headed the finance function at the best of breed MNCs as well as startup companies, I have no reservations in confessing that both work on the two extremes of the financial jigsaw. While in typical MNCs, there is unwarranted focus (or ostentation, if I may say that) on processes, controls and planning, the same is utterly disregarded by our entrepreneurial warriors.
Here I list down five important areas where the entrepreneurs need to be extra cautious so that their business ideas don’t go bust when translated to numbers.
1. You owe it to the taxman – While negotiating contracts with the customers, the taxes and duties are mostly ignored whereas the fact is that the taxes can shave off between 10 to 15% from your bottom-line! The customer would always want to negotiate rates which are inclusive of taxes which means that of 100 rupees of revenue, you are ultimately realising only 90 (assuming a tax rate of 10%) because the onus of paying taxes is on you and not on the customer. The moral of the story is that the taxes like VAT or service tax and duties such as entry tax, octroi, shipment and packaging should be over and above the price of the service or the product.
2. There are no “verbal contracts†– For a contract to be legally valid, there has to be an “offer†and an “acceptanceâ€. In simple terms, the contracts should be in black and white, and signed by both the parties. Even an email may not hold strong as evidence in the court of law. I have seen contracts with open-ended indemnities, contracts without termination clauses, arbitration clauses and jurisdictions. Such contracts are suicidal given that the revenue distribution of startups is highly lopsided towards a few customers. Additionally, the rights and obligations of both parties should be documented as clearly as possible in the agreement.
3. Get your metrics right – The importance of defining the metrics or KPIs relevant to your business and regularly measuring them can’t be overemphasised. Some of the metrics like conversion rates, website traffic, page views, sales productivity and ARPUs need to be measured more frequently and others like the income statement, cash flows and balance sheet ratios should be reviewed at least at the end of each month so that the investors don’t get a rude shock at the end of the year when the financial statements show a much lower balance than what they had invested. Needless to say that the basic accounting and MIS systems should be in place to ensure that your metrics is not GIGO.
4. Keep your business in control through internal controls – In many startup organisations, it may not be possible to hire an internal auditor due to resource constraints. However, at least the basic controls like segregation of duty, separate maker and reviewer, ledger scrutiny, etc. will help mitigate frauds and leakages. The leakages may pervade in all functions of the organisation in absence of proper controls. For example, in case of order management, unless the actual delivery is audited against the order form by someone other than the operations executive, the leakage may never be discovered especially in case of a service business where there is no inventory.
5. Inventory and receivables are silent killers – My two cents to all startups which manage their inventory and receivables well. Some just focus on revenues or invoicing to accelerate their topline not realising that the debtors are piling up at the same time. The efforts to collect your receivables should be continuous and dedicated. The same focus should be there for e-commerce companies which hold inventory at multiple geographical locations. The inventory at each location should be reconciled daily to prevent any leakages. Optimal levels of receivables and inventory go a long way in saving precious dollars for the business. And ultimately, it’s all about money honey!
(Vikram Mehtani is the chief finance officer with Vriti and part of their senior management team.)
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