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ES-V: The Working Capital Dilemma for Startups

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What is Working Capital?

Product manufacturing companies require money to manufacture goods and sell. The company has to  invest in purchasing raw materials, manufacture the goods, sell them and collect money. There is a time gap between the starting of the expenses (on purchasing raw materials) and realization of sales money for the goods. The money required for producing goods and selling during this time gap is called the ‘Working Capital’. It includes expenses on raw materials, labor, electricity, other utilities, packaging shipping costs and taxes (GST) paid for all the items.
Pic Credit: Investopedia The expenditure to make the product could normally start with the receipt of order in B2B segment.But that depends on factors like, how long the consumer is ready to wait, time taken to procure each and every item required for production; and finally manufacture the goods. Often, the consumer may want delivery immediately or soon after placing the order. In that case, the product compa…

ES-IV: Managing Finances of a Startup

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Profit & Loss and Balance Sheet
While cash-flow management is a priority for startups and mature companies, an important question one needs to ask is how much money a company will generate from each unit of product or service that it sells (or plans to sell). A good understanding of this will help the entrepreneur arrive at the number of products / service offerings to be sold, for the company to break-even and become profitable.We will start this blog by understanding Product / Service Margin. This will play an important role when we take up Profit and Loss(P&L)computation later.

Though a startup may have some distance to go before actually selling products/services, these estimates should be computed even during the product development stage. Let us term this Product margin estimation. When the product/service is being sold, this straightaway gets plugged into the P&L. The margins multiplied by the number of units sold and delivered will be cash-inflows in the cash-flow co…

ES-III: Gaps between ORDER, DELIVERY & CASH-INFLOW

Order,DeliveryandCash-Inflowfor a product or service are three related but different events impacting the finances of a company. They have a time lag with respect to each other; also, while in most cases they follow each other, at times, there may be risks associated with these. The impact of time lags as well as risks associated with the company’s finances must be understood by an entrepreneur. 

When a company gets an ORDER for its product/service, it is time to celebrate. But the order-in-hand is only the beginning of a journey. This does not get reflected in any of the financial statements of the company. The order-in-hand and order-in-pipeline (likely to materialise) are nevertheless extremely important and presented to the board as such. 

The minute the company gets an order, it has to plan DELIVERY against the order. Expenditure for fulfilment of delivery against the order would start immediately (sometimes even before the order is received). The financial statements (cash-flow st…

ES-II: Cash-Cash-Cash

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Many entrepreneurs in India come from a technical background, but lack experience in managing an organisation, specially its cash-flow. Normally enthralled with their exciting 'ideas', entrepreneurs are certain that these will make their company great. They believe that their ideas are so strong that investors will always put in money as and when required. They often do not appreciate the value of money or the risk investors taken by the investors. Many founders do not know how to make the best use of the invested funds and feel no obligation in managing the invested money well. Often, they have a negative view that the investors are only interested in returns and their marvellous idea is worth the investment. Founders seldom work to maximise the probability for investors to get a decent return in the long run. Moreover, they rarely know how to manage cash-in-hand and maintain a cash-flow, so that the company can be prepared for a long haul. It is this mistake that often jeopa…