Dubai: With entrepreneurship comes financial anxiety related to sustaining and scaling up the business. Sometimes even an entrepreneur’s personal sustenance may be linked to the business. While this is a reality, it’s also true that entrepreneurs who plan finances carefully to offer a safe runway for the business have higher chances of sustaining and growing.
Knowing exactly when and how much to invest and when to stop is crucial because too soon or too late can both cause challenges for a start-up. This article will explore some common financial mistakes that entrepreneurs can and should avoid through careful planning.
A financial mistake usually has two connotations. First, if money is being spent at the wrong places. Second, inaccurate anticipation of financial requirements for a business for a specific time. Resultantly, this might create financial strains for the business and the entrepreneur, said serial entrepreneur Chanda Lokendra Kundnaney. She has run two businesses prior to launching her current start-up LiZZOM, a UAE-based organic and biodegradable menstrual care brand.
Entrepreneur Mistake #1: Get out of a business too soon
Having a strong financial background, Kundnaney cautiously invests money in the right places at the right time, so the first point is not a challenge for her. But “getting out (of a business opportunity) too soon” was a financial mistake that Kundnaney made in her previous businesses, especially in her restaurant business where she doubted the scope of scaling within a specific period.
“Like investing in wrong places is a financial mistake, not investing at all is too. For my first two businesses, I had started out with a general concern about investing. I constantly worried about the possibility of running out of money. That restricted me from investing money at the right places at the right time. If I had approached it differently by holding on for a little longer and invested some more money the businesses would have sustained.”
Lesson to be learned: Start-ups should try to keep aside a fixed sum of money to sustain the business and personal expenses for at least two years. It’s not advisable to expect high returns from the business during these two years, treating it as an incubation period. Two years is a good enough period to understand if the business model will work, how scalable it is and how much profits it can make going forward. This gives entrepreneurs enough time to focus on laying a strong foundation and growth strategy for the business. Importantly, even before starting a business an entrepreneur should try to gauge scalability to not pull out too soon or go on for too long.
Entrepreneur Mistake #2: Not accounting all costs, resources
Keeping an account of everything from day one is a crucial exercise for any start-up. Just like reaching a certain number of customers is a business goal, there must be tangible financial goals too. This will help in understanding expenses and plan financial resources accordingly.
“It’s not necessary for every start-up to be a unicorn. Any start-up that maps out financial goals right from the beginning will do well based on their clarity of expenses and expected returns. For this it’s crucial to set up a proper accounting system, an area that must not be overlooked. Sadly, many start-ups ignore this. Half of them will make mental notes of expenses. Some of them maintain an excel sheet. While only a few, under-25 per cent, maintain a proper accounting system through free-to-use apps or hire a freelance accountant to regularly review cash flow.”
Lesson to be learned: It’s recommended to keep personal and business expenses separate from one another especially for start-ups with co-founders. This becomes especially crucial when such a start-up decides to raise funding making valuation easier and accounting more transparent. On the other hand, smaller official or personal expenses might not always require separate logging if it’s a single founder-led business. Nonetheless keeping an account of expenses is still crucial.
Entrepreneur Mistake #3: Raise too much or too little money
In some cases, start-ups tend to either raise too much or too little investment. That’s why defining the money requirements optimally is pivotal. This helps in avoiding raising more investment than required and vice versa. Ultimately this impacts the health of the business since investors must be either paid back or allocated shares, Kundnaney pointed out.
Lesson to be learned: When a start-up reaches a point where it’s prepared for external investment, it’s recommended to spend some money to get a proper valuation and financial plan done. When a third party does the valuation, there is little chance to under or over value the company. Kundnaney also shared an advice that she had received once: “If you want to bring an investor on board show them the numbers accurately. Even if things like cost of customer acquisition is high, show the numbers.”
Entrepreneur Mistake #4: Not setting aside a salary
A small business or a start-up tends to plough back earnings into the business at least during the initial period of operation. However, for many start-ups earning also serves as a source of personal sustenance. Thus, it’s important for an entrepreneur to allocate an income or a salary for themselves.
“Even entrepreneurs have bills to pay. We have a social life and certain financial commitments,” Kundnaney stated. “Since setting up LiZZOM, I’ve mindfully kept aside a salary for myself. I’ve consciously created timelines after which I withdraw a certain amount of money from the company as compensation and perks. Even a founder needs financial reward against the efforts we put into running our own business. In case a business is not able to compensate with regular salary, it must be kept as an account to be fulfilled when the entity starts making money. Such an account also comes in handy to estimate effort and money to be given to the founder, co-founders and employees when investors come in.”
Lesson to be learned: Not setting aside any money for personal use of the entrepreneur is neither practical nor sustainable. While Kundnaney has self-funded her business so far, she foresees raising investment soon to pursue future growth. When that happens, she plans to set aside a certain sum of money for herself as compensation for the years spent on building the business, clearly indicating the same to investors.
Entrepreneur Mistake #5: Avoid taking calculated risks
A message that Kundnaney wants to share with the start-up community and fellow entrepreneurs is to not avoid taking calculated risks. “It might sound clichéd but it’s true. For example, in my current start-up I had to first raise awareness about the product among women. Even though I was advised to go out and launch the product at once, I consciously decided to spend time to first raise awareness about the importance of using safe and hygienic sanitary care options and then launched the product. That’s a calculated risk that I took.”
Lesson to be learned: Take one step at a time. In case of a product-based start-up like Kundnaney’s, producing in small quantity tends to be more expensive. But when bootstrapping it’s prudent to test customer reactions with a small batch of products over investing in a massive stock-keeping unit (SKU) right away.