We are living in an exciting era, where one can embark on their start-up journey with reasonable chance of success. Even the society at large is supportive (there used to be a time when one did not get married unless they had a government job). Given the low cost, and on-tap technology, it is possible to come out with large disruptive ideas. Capital is also available for good ideas. It would be fair to say, that this is probably the best period for your start-up journey (there will be better periods in the future for sure, but that is for someone else).
Having said that, the start-up journey is fraught with its own financial risks. In many cases, if you don’t plan your finances well, it can even impact your life journey. Keep these questions in mind and plan accordingly.
1. Do you have sufficient cash in the bank
The initial years of the start-up journey will be very low on cash flows. In most cases, one should plan to survive on their savings for at least three years. The business may generate some cash flows, but most of it needs to be ploughed back into the business. Ensure you have at least three years of your expenses stashed away. Better to put this away in a ‘liquid fund’ and keep drawing down as and when you need it.
Ideally, if you had planned well, you should have more and therefore are able to fund a reasonable part of your expenses from the income you generate from the investments. In such cases, one can have three years of expenses stashed away in debt funds and the rest can be in long term equity funds.
2. How much capital does the business require
In many cases, the initial period of the business needs to be boot-strapped. The entrepreneur would need to fund the initial capital requirements of the business. It is also sometimes difficult to establish exact capital needs – as not only the upfront capital required needs to be figured out, but also the cash burn in the initial period.
Make sure you set aside the maximum funding you can do and stick within the budget. Working with other founders helps in such cases, and so does bringing in outside investors early on.
Do not, under any circumstances, invest beyond your means or through borrowed money. If you don’t have sufficient money, get outside investors to participate before you begin.
3. Have a Plan B
Start-up businesses are unpredictable. If there is one thing for sure, they never go according to plan. Always have a Plan B. Try and create a second stream of income (maybe some freelancing, etc – why not work another 20 hours a week if you want to pursue your dream), which can support your Plan A. Having the Plan B helps you ensure that the Start-up is allowed to run its own course, without your personal financial situation creating a stumbling block.
4. Watch your expenses
The good thing with being a start-up founder is that, folks will want to spend time with you in any case. The energy does come through and people would just want to spend time with you to absorb the energy. You don’t really need to try and match the lifestyle of your ‘high salary’ friends. That is a different journey. We remember a breakfast meeting with a founder several years back, over a simple “Idly & Vada” – that founder is currently on track to riding a Unicorn. He had no qualms doing a simple meeting. All that mattered to him was the idea.
Go out there. Change the world. Being a little practical about finances helps in the journey.