Monday, April 30, 2007

Financial Management for a Startup Firm

Himanshu would like me to be his first Guest Blogger and write some stuff on Finance.The reason, Himanshu says, is many people like him are techie guys but they are not so much aware about Finance.

Is it important for a startup to understand corporate financial information, evaluate corporate financial performance and understand the language of accounting and finance?

I feel that the idea of a startup is a romantic and sexy one till you start the start up. Once you are confident of your idea and think it’s time to make it happen, it’s time to do some reality checks.

Let us ask the “bringing back to Earth” questions with a financial angle. In fact the business plan of a startup firm should incorporate the source and application of funds, projected cash flows, Sales forecast, ROI, Breakeven analysis etc.
  1. How much money is needed to launch the project? What are the short term working capital needs? Here you try to understand your capital requirements.
  2. What return on investment can the business bring? This is the first question a VC would ask. You have to work on the ROI that your business can bring.
  3. What could be the possible source of funds? Friends, relatives, VC or a Bank?
  4. What are the projected Sales forecast and the likely expenses? You may do well to build a projected cash flow statement for the next 1-3 years.
  5. When do you look to cover your initial costs? In other words, when do you break even?
  6. Can you build a projected balance sheet for your business?

Difficult questions? Maybe yes, but if you are not prepared to answer them or face them, the startup may remain just a pipe dream.

If success was easy it would no longer be success. Admittedly, though finding the answers is not like rocket science, it looks entirely geeky to many of us.

There are no ready made answers. It follows after you are able to define your business, review your competitive environment and do a SWOT analysis for yourself.

And tools? Start with a pen and a paper, quickly graduate to Excel sheet or any other spreadsheet and you are on your way!! Getting started is all you need to worry about!! haven't we heard Goethe's couplet: Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it.

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