“Cash is king, queen and jack“, applies to poker game as well as start-ups. Most entrepreneurs are so focused on building their business idea that accounting has become their last priority. “By the time they approached it at year-end, it’s too late,” said Philip Wong, a management consultant and Head of CFO advisory services, FastLane Group. So what should entrepreneurs start doing now to ensure financial health? Philip shared his top five mistakes and actionable steps for entrepreneurs.
– Mistake 1: Lack of a decent business plan and realistic financial goals to become self sustainable
Start ups are used to pitching to investors to secure funding but most haven’t thought about when and how to transition from investor capital to revenue to fund their business. A solid financial plan is critical to this.
– Mistake 2: Lack of understanding of your competitiveness to price your products and set payment terms accurately
“You need to know your market well to assess if you are truly a disruptor, or just another player. This will affect your ability to command a higher price point, your negotiation power with suppliers, and whether you need to offer better payment terms to your customers as a selling point. This will all have an impact on your cash position,” noted Philip.
– Mistake 3: Not understanding your monthly burn rate and cash reserve, and impact on payment and credit terms
Some entrepreneurs don’t know their monthly burn rate[i] and the minimum payment and credit terms they need, hence they are unable to negotiate for the right terms, causing capital to dry up very quickly. “An entrepreneur should know his monthly burn rate from the top of his head without asking his accountant. And a healthy start up should also have 3–4 months’ worth of operational cash flow as their cash reserve.” said Philip.
– Mistake 4: Leaving financing and accounting system to the end
Start-ups under-estimate the workload needed to set up accounting system, leaving it for tax filing at year-end, often causing tax and legal implications at personal as well as corporate level. Philip shared with us three examples from his experience:
– Mistake 5: Raise fixed costs too easily especially headcount, leading to exponential increase of burn rate
For start-ups who are still in their growing phase, replicating the organization structure of large corporate may not be useful, especially in terms of headcount. “Start-ups don’t realise that adding headcount results in disproportionate increase in their cashflow requirements, such as salaries, larger office space, MPF, laptops and other office supplies.” The solution? Build a small team with people who can wear multiple hats, and consider using part-time and outsourced supporting functions before hiring full-time employees.
So a clear message to all entrepreneurs — start reviewing your financial health today and don’t wait till year end!
Philip Wong, Partner and Head of CFO advisory of FastLane Group gives us the best advices to ensure financial health for the company