WIRC Bulletin - July 2018

Challenges before Entrepreneurs for Sources and Application of Fund’s By Dr. Amardeep D. Jadhav

Challenges before Entrepreneurs for Sources and Application of Fund’s By Dr. Amardeep D. Jadhav

Asst. Professor, Chhatrapati Shahu Institute of Business Education and Research, (An Autonomous Institute) Kolhapur-Maharashtra.

Abstract:

A primary inhibitor of business start-up is that few people have the financial cushion to give up a job for the unsure income of a start-up venture. Here we discuss ways to stretch startup funds, and how to deal with the stresses of the financial risks involved. A primary inhibitor of business start-up is that few people have the financial cushion to give up a job for the uncertain income of a start-up venture. In a recent survey, about 30% of new business founders identified inadequate funding as their biggest hurdle, and a similar amount said lenders were too conservative. About 15% reported being unable to find investors, and a similar amount claimed a lack of collateral. The prospective new business owner approaching a lending institution should keep in mind the “five c’s of credit:” character, cash flow, capital, collateral, and (economic) conditions. Character consists of the borrower’s integrity, experience, and ability; particularly close attention is paid to a borrower’s credit history, which is a matter of record. Should you decide to try to fund a startup through a commercial lender, the remaining criteria are addressed in the loan request. The loan request should include a credit application, financial information such as tax returns and personal financial statements, and a brief business plan emphasizing projected financial performance of the new venture. The plan should demonstrate how the business will generate sufficient cash flow to repay the loan, specify collateral, and show the borrower’s personal investment. In addition to servicing the loan, cash flow should also cover operating expenses, and provide for some re-investment for the increasing financial demands of a start-up venture. As collateral, banks will often lend up to 80% of the market value of real estate, and up to 50% on business assets such as equipment, inventory, and current accounts receivable. Lenders and investors often require that the bulk of start-up monies be provided by the business owner. This assures these stakeholders that the owner is committed, and has confidence in the financial projections. When the entrepreneur cannot meet the requirements of commercial lenders, and does not have a favorable arrangement with partners or other investors, the remaining options are difficult and expensive. These options include public-sector guarantees, finance companies, and the venture capital market. Even where the start-up investment consists largely of other people’s money, the amount of financial risk for the entrepreneur is beyond what most can responsibly handle. For many with the financial means, the stress of bearing complete responsibility for the company’s direction and performance is the discouraging factor.

 

Key Words: Funds, Problems, Start-up, Cash flow 

Introduction

Cash flow is necessary to small business survival, yet many entrepreneurs struggle to pay the bills (let alone themselves) while they’re waiting for checks to arrive. … Waiting to get paid can make it difficult to get by – and when a customer doesn’t pay, you can risk everything.One of the major aspects of any business is the financial stability. While cash flow is very important, it is even more important that you are in control of your finances. You should always have a backup plan as far as your financial stability is concerned.

Financial challenges are some of the most painful ones entrepreneurs have to deal with. However, making a list of financial challenges and staying close to them can help a small business survive even in times of economic instability.

Entrepreneurs can face a variety of financial issues that can impact the business’s profitability, and even its long-term survival. Some financial problems may be caused by factors outside of their control, like when the economy dips or a new competitor moves in next door. Other issues may be more directly related to how entrepreneurs choose to operate their business.

Obtaining Financing

Obtaining financing for a business can be extremely difficult, especially when first starting out. Banks are reluctant to lend money to new businesses, and potential investors may steer clear of budding entrepreneurs with little or no prior business experience. A well-crafted written business plan is essential when attempting to convince lenders and investors that you know what you’re doing and have thought through your idea carefully. Other possible financing sources can include loans or grants from the Small Business Administration or even borrowing from friends and family members.

Negative Cash Flow

Cash flow refers to the amount of money coming into the business by means such as revenue from sales, versus the amount leaving the business in the form of expenses. Start-up companies may have difficulty developing and maintaining a positive cash flow, especially during the early stages when they have yet to establish a regular customer base. Spending too much money on things like rent and employee salaries can also create negative cash flow.

Mismanaging Marketing Funds

Entrepreneurs may be tempted to spend money on one expensive advertising medium like television, thinking it is the best way to reach a large number of people. By doing so, they may not reach their desired target market, rendering the ad ineffective. In contrast, some very small business owners may feel that they can’t afford to spend much money on marketing, As a result, few people hear of the business, making it difficult to build a sustainable customer base.

Inadequate Insurance Coverage

A business owner’s medical disability or a large liability claim can cause the financial ruination of a business. Some business owners may choose to do without items like health, disability or liability insurance to keep expenses to a least. However, doing so can put the business at major risk. As a rule of thumb, business owners should carry enough insurance to cover any expenses they could not afford to pay out of their own pocket.

Lack of sufficient working capital

Working capital is the life blood of any business and it is the most important responsibility of any entrepreneur to have at least 6 months expenses as working capital which gives him enough breathing space to focus on acquiring new customers and building products. The most relevant way to avoid this by figuring out a way to cut your costs by 20% and put that aside to build up working capital. If you’re a start-up that is yet to make profits, make sure you are adequately financed.

Sales are good but profits are low

This is another major setback that most of the businesses face at some point or the other. Generally, such a situation indicates over-spending or hidden costs eating away at your bottom line — your expenses could be out of control. To avoid such a situation proactively create a purchasing policy and system to ensure that you are buying the right materials at competitive prices from vendors that add value. Ensure there is supervision of policies, ordering, receiving and reporting. Don’t hesitate to revisit vendor selection and old contracts to start price negotiations. Lastly, if you frequently make online purchases, use free apps to track spend, hunt bargains and streamline online purchasing.

Not being ready to face sales slump due to unavoidable reasons

“In startups the only real sin is running out of cash, and the cardinal sin is running out of cash unexpectedly. So whilst you may not need a CFO, you sure need someone who understands cash flow and can give you the confidence to know when it’s running out.”

To avoid such a situation, keep a check on your financial statements so that you are able to forecast cash needs. It is important and inevitable to have total control on the movement of money.

 Receiving late payments from clients on a regular basis

80% of small businesses are still plagued by late payments and of this happens too frequently, it can potentially kill your business in the long run. It is very important to tighten up credit terms or create policies and processes to manage the situation. To avoid such a situation, some of the remedies could be to pull business credit for new customers, communicate payment policies early and often, incentivize early payments, make it convenient for customers to pay and enforce late payment penalties. Most importantly, do it all with a smile.

Paying bills late on regular basis

As important as receiving payments might look, it is equally important to pay bills on time as well. Find out the reasons for late payments. If it’s a cash flow problem, you need to start renegotiating your payment terms; or start looking for customers with better payment terms. Otherwise, it’s important to make a monthly budget and follow it. Set aside a specific day of the week just to go through accounts payable and sign checks.

Too many sales promotions, coupons and markdowns just to stay afloat

Businesses retort to sales, promotions each time a business runs slow, however, if sales are slow, offering excessive discounts is not the answer. Consumer-oriented sales promotions can drive short-term sales to offset competitive pressure, yet threaten the long-term survival of your brand. Price wars come with high casualties – most notably, reduced profit margins. Instead, revisit your business and revenue model to find answers.

Not choosing the right funding option

It is very important to understand the one needs to be very confident about the reason one is looking for funds. A variety of funding options are available to small businesses: bootstrapping, friends and family, crowd funding, business loans, grants, venture capital, angel money, etc. Despite of having so many options it is very important to have clarity on your current financial picture and assess risk tolerance for each funding vehicle. Do a thorough research and then only finalize your funding options

Unorganized book keeping habits

Books of finance hold a very important place in running any business venture, however, small business owners are usually bad record keepers. And they consider this to be one of the most boring tasks in a business. Hiring an organized book-keeper can save you a lot of time. Find someone on your team who can take on this responsibility. A good administrative assistant can sometimes do an effective job at this.

Not being good at cash flow management

Cash flow literally translates to “money in, money out.” Monitoring cash flow can forewarn you of a need for cash and reveal cycles in your business; better preparing you for the financial road ahead. Staying on top of your cash flow position can be tedious. Thankfully there are free templates, cash flow calculators and paid apps which you can use to get on top of the cash flow management game.

Improper revenue and expense projections

For any business to flourish it is very important for the entrepreneur to know the various revenue sources and the expenses that will be incurred in the course of business. If your business is fairly young it’s hard to predict revenues. But expenses can be predicted because most of them usually remain the same month on month, except for some unforeseen expenses. It again depends on the nature of business. Always be thoughtful about your expenses rather than being impulsive. Because in case of impulsive decisions there’s a probability of expenses going off track. Always have a budget in place during your decision making process.

Finances are the life blood of any business and no business can run without a consistent cash flow hence it is very important to be financially prudent and track your finances to stay ahead of the game.

Fierce Competition

The corporate world is quite fierce. There is always a competition going on between the giants. Competition poses one of the biggest challenges for the survival of startup businesses.  And if you have an online business startup, the competition gets tougher.

The competitive environment keeps the startups on their toes, as there is no margin of error available. Both B2B and B2C organizations always tend to feel the heat of the fierce competition. In order to survive in this competitive business environment that covers both traditional and online businesses, the startups need to play aggressively, and punch above their weight to gain the much needed recognition amongst the clusters of ever challenging and expanding businesses.

Unrealistic Expectations

Success does not come alone. It brings expectations with it. Most of the times, these expectations seem realistic, But in the real sense of the word, are merely unrealistic. This same concept holds true for young startups.

Startups tend to face challenges when they set ‘unrealistic expectations’ following a booming success. Remember, success is short-lived and expectations never end. This is where startups need to translate what the real expectations are? Sustainability is the name of the game. And sustainability requires consistent efforts.

In order to succeed in a competitive business world, startups need to have high but controlled expectations, keeping view of the resources available, the extent of growth potential, and other market factors as well.

 Hiring Suitable Candidates

One of the most important factors that define organizational culture within a startup company is the synergy of the team. A team comprises of individuals with similar capabilities and identical focus. In order to develop a highly successful team culture, organizations in general – and startups in particular – need to hire suitable candidates.

There is a huge pool of aspiring individuals available. Selecting a suitable candidate that fits the job well enough is a peculiarly tricky task. It is one of the biggest challenges facing the startup businesses in this digital age. When hiring a suitable candidate, organizations must remember one golden rule: Birds of a feather flock together.

Partnership Decision Making

Partnership is the essence of success. And this logic holds true for startups as well. In this ever-expanding and ever-changing digital era, where organizations need to battle hard for their survival, startups also find it difficult to find trustworthy partners. It’s really a big challenge for startups today. And as far as tech startups are concerned, stakes in partnership are much higher for them.

Going into a partnership pays great dividends for the startups, but they need to consider a variety of factors before making any decision to collaborate with another company working in the same ecosystem. To reap out maximum benefits out of a partnership, startup businesses should look for organizations that enjoy a sound presence within the market and a good reputation amongst the industry giants.

 Conclusion

While maintaining a successful startup is extremely challenging (and rare), there is good news for those entrepreneurs who have had at least some measure of success early on. The most important piece is that you have found a product or service that works well and helps the market in creative and useful ways, proof that it’s not simply left to luck.Don’t overspend, particularly on office overhead. The beauty of startups is that everyone who helps at the start is, as I say, “really good with duct tape.” But once you experience a little success and that all-hands-on-deck spirit is gone, things can easily become bloated.Be extremely careful when considering outside funding. Some industries, like software solutions, require a quick turnaround from startup to market. That usually only comes with outside investors. However, the moment you take money from outsiders is the moment you go from being the founder to being someone who can be fired. Every startup faces challenges before they can secure their place in the market. There are many obstacles associated with starting a business and others that come with running it and making it profitable. A research on startup failure outlines that a lot of businesses begin with great prospects, but an alarming 90% never make it past the three-year mark because they don’t have the tenacity or knowledge of how to overcome the challenges they find themselves grappling with.Starting and growing a successful startup requires a lot of time, effort, money, and energy. Even with great funding, an entrepreneur needs to have the determination and persistence to lead the business through hard times. Knowing what to expect can help you prepare for difficult times and have solutions ready for when trouble occurs.

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