After funding, surplus cash a headache for start-ups

Without the assistance of in-house treasury operations, early-stage firms usually turn to their investors for help to manage their funds

Capital Float, a start-up that lends to e-commerce merchants, raised $13 million from venture capital firms SAIF Partners and Sequoia Capital in February. The two-year-old company was suddenly flush with cash. Its founders were, however, at a loss about how to manage the funds that would be needed several months later.

Gaurav Hinduja and Sashank Rishyashriga, the founders, had a new problem to worry about amid the excitement of raising Capital Float’s largest round of funding. It had raised $4 million in the first round.

“In the four million round, there wasn’t much of a surplus to look deeply into treasury (management). But with $13 million, the treasury is huge and so now there is a lot more focus on managing the treasury,” said Hinduja.

The problem is not unique to Capital Float. As start-ups increasingly raise large amounts of capital and without the assistance of in-house treasury operations, unlike established companies, the early-stage firms usually turn to their investors for help to manage their funds. Often it’s the investors that hand-hold the founders in the initial stages by putting down guidelines for investment of the capital raised.

“Many early-stage companies don’t have CFOs (chief financial officers) and financial controllers and do not understand the nuances of such investments,” said Kushal Agarwal, chief financial officer of Aspada Investments, which was one of the funds that invested in Capital Float in its initial round of funding. Agarwal, for instance, helps the fund’s portfolio companies manage cash operations.

Investors sometimes point them to qualified advisors. Larger funds prefer to have portfolio companies appoint specialists.

“Start-ups in the early stage or Series A stage usually do not have the wherewithal in the finance department—either to make the investments or adhere to the investment guidelines set by VC (venture capital) investors or to have detailed reports generated to track these investments,” said George Mitra, chief executive officer of Avendus Wealth Management, which helps start-ups with managing their treasury operations.

Investors don’t want promoters to spend too much time managing funds and would rather have them focus on building the business, Mitra added.

“Usually, they require some assistance from external parties, except for companies which have very large treasuries,” said Mitra.

But where do these start-ups invest the surplus cash?

When it comes to investing the idle cash, both start-ups (inherently risky businesses) and VCs (who invest in these risky businesses) prefer to play it safe.

“The most important thing is to invest these funds into assets that are not risky at all. So no equities and no fancy structured products,” said Hinduja. Hinduja’s Capital Float works with three-four wealth managers to invest its cash.

Mitra of Avendus agrees.

“These funds are not meant for maximizing returns. They are meant for a specific use of the company, which can be either working capital requirement, supporting the cash burn or as part of an acquisition strategy,” said Mitra, adding that investors want them to look at optimizing returns rather than maximizing them.

Fixed deposits, liquid funds and debt mutual funds are the most preferred investment assets for start-ups wanting to park their surplus cash. Firms can expect yields of around 7-9% from these assets. A liquid mutual fund invests in money market instruments such as short-term papers, commercial papers and government bonds.

“If something is required in the next 30-60 days, we generally put that amount in liquid funds. And what is not required in the immediate two-three months, we put that in six month or 12 month fixed deposits (FDs),” said Sujayath Ali, co-founder and chief executive at Voonik, a fashion app. Voonik raised $5 million from Sequoia Capital and Seedfund in June.

Agarwal of Aspada says that currently FDs make perfect sense for start-ups to invest funds that will be needed several months later as interest rates are expected to fall.

“Another benefit of FDs is that the interest on FDs is tax-free for most start-ups as they are generally loss-making entities,” he added.

However, it is not that these assets are completely risk free.

On 4 September, The Indian Express reported that start-up Oyo Rooms, which had invested close to Rs.100 crore in two short-term funds of JPMorgan Chase and Co. in India, was considering legal action against the asset management firm after the redemptions from the fund were restricted.

“Some of the key risks associated with these assets are interest rate risk and diversification risk,” said Mitra. Longer-duration funds are more prone to changes in interest rates.

Diversification is also important.

“You do not want to be a large part of one particular fund,” he added.

Liquidity is another important factor for start-ups to keep in mind.

“A company might change its business plan and might need to withdraw a large sum of money for a big marketing campaign. In such a case one would like to have the option of withdrawing money at any point of time. Hence, investors don’t encourage assets with deep lock-ins,” said Agarwal.

Whether start-ups manage their cash in-house or through external advisers, and whether they invest in FDs, liquid funds or debt funds, the basic tenet remains the same.

“The idea is not to think about earning returns on the money. The moment you start to think on those lines, you will start taking risk on that capital,” said Mukul Singhal, principal at SAIF Partners.

Advise for contacting VidyaSunil & Associates

Cell No. +91 9739834819

E Mail ID : vidyasunilassociates@gmail.com

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How Do I Build a Business Plan? (Infographic)

You have a powerful idea for the next big thing, but before you sell it to anyone, you have to get it all down on paper.  It’s time to make a business plan.

How do you know if you’re headed in the right direction? Washington State University created an infographic that provides 10 guidelines to help prospective entrepreneurs organize their thoughts and wow potential investors.

The infographic details some major questions that aspiring CEOS need to ask themselves like, what problem is my business going to solve, what’s my company’s mission, and what do we do better than anyone else in the market?

But you aren’t quite done yet. A thorough business plan includes who your target demographic is, the conditions of the market you’re entering into and accounts for worst-case scenarios. And of course, there’s the money: how much you need to get going, and where it’s going to come from once your business is up and running.

For more information, like how much funding you’ll need before applying for a small business loan (that’s 30 percent), check out the infographic below.

Your Mission Statement May Be Utterly Useless or a Gold Mine

Nine out of 10 of all the mission statements I read in business plans are wastes of time, paper or digital space. The rare one is a useful view into strategy or a helpful reminder about long-term goals.

I read hundreds of business plans every year. I get to do so since I’m a member of an Oregon angel investment group and also because every year I judge several major venture competitions. Mission statements are common because a lot of literature and advice about business plans recommends including one.

So what makes a mission statement useful? I see two kinds of approaches to mission statements that work:

1. Outlining goals for customers, employees and owners. I believe a healthy business benefits all three groups. Most mission statements include the proposed benefits for customers, but relatively few include goals for employees and even fewer include goals for owners.

But why not? Doesn’t the business exist to make profits for owners? Doesn’t it need to find, keep, inspire and compensate employees? Such objectives are all part of the mission.

2. Defining a strategic focus on a specific target market segment.This would include a particular kind of business offering intended to appeal to or meet the needs of that specific market group.

The best mission statements do both: They set the goals and define the strategy.

Consider this hypothetical example, an imaginary mission statement for a fictitious restaurant:

“We offer organic gourmet food from local sources for people who appreciate fine dining without compromising healthy eating. We want a diverse and respectful workplace in which chefs can be creative and experiment and people can enjoy working with people. And we want to make a fair return on our owners’ investment.”

A good mission statement serves the business as a useful day-to-day reminder of core strategy and long-term goals. And in the special case of a business plan developed for investors or lenders, the statement gives a useful summary of goals and strategies.

The most common reason for a mission statement to fall short is that it is just a collection of buzzwords and clichés that say nothing. You may have heard of the Dilbert mission statement generator. The website is no longer available but it strung together random high-minded phrases to create mission statements devoid of all meaning.

In his book The Art of the Start, Guy Kawasaki suggested a simple test to expose the futility of most mission statements. Take a mission statement, he said, and try to guess from its words alone what business it pertains to. Can you tell a business from all its competitors through its mission statement? Not often.

Look at your company’s mission statement, if you have one: Would your customers know that’s yours and not your competition’s?

Conclusion: Don’t do a mission statement for your business unless it has some strategic use. Generic mission statements are just a waste of time. And a business plan doesn’t need a mission statement unless it serves a specific business function.

Write a Winning Business Plan With These 8 Key Elements

For everything in life, you need a plan, right?

The same can be said for business. Every business, whether a startup or a full-fledged, profitable organization, needs a business plan. To know where you are going, you have to know where you came from and what came before you.

Here are the key elements of a winning business plan.

1. Executive summary. An executive summary is a one- or two-page summary of your entire business plan. It’s often easiest to write your executive summary after you’ve finalized all the details within the plan itself.

2. Business description. In your business description, you’ll need to include and define various aspects of your service offerings, the history of your field and any current happenings and your personal goals and objectives, elements that add to your success and the ownership of your company. This section is the backbone of your business plan and will set the stage for the information included in the rest of the plan.

3. Products and services. Everyone has a product or service that they are offering to a prospective client. You should be able to describe what it is that you are selling as well as identify what makes your product or service unique.

4. Sales and marketing. This section is very important. It gives you a window into your industry, the state of the market, general costs, how business is acquired and also affords you an opportunity to distinguish yourself from competitors.

While you are making the most of this section, also realize that just as people who walk by physical stores on the street can see what’s going on at a place of business, visitors to your website also have the ability to browse your merchandise and become familiar with your personal branding.

Make your website your online storefront both in thought and deed.  Consider the following:

• You can provide samples or demonstrations of your product.
• Graphics and or photographs are your visual marketing materials.
• The URL (website address) is your “location.”
• Equipment that you use and product delivery methods are manufacturing and shipping tools.
• Website navigation is like the layout of a physical store.
• If you have a site map, it helps to direct people to what they are looking for like a map in a department store.
• Showcasing testimonials, affiliations and experience in easily accessible areas of your website builds credibility and instills trust with a customer.

Presenting your contact information enables people to do business with you. Detailing information about yourself, even though you aren’t actually in the presence of a prospective customer, gives a good first impression of your personality, qualifications and services.

Rather than just thinking of your website as a dormant place to tack your name on, kick it up a notch and view your website as an online storefront — the place where business gets done.

5. Operations. This purpose of this section is to help you outline the more administrative side of your business, including how you operate, where your office is located, your staff or assistant if applicable, equipment, overhead and other expenses, legal relationships, your network of suppliers and credit policies.

6. Management team. If you have a few advisers or people who help you to manage your business, this is where you acknowledge their involvement and the capacity by which they contribute to your overall success. Also, if there is a hierarchy of positions within your company, you would detail that hierarchy and the relevancy of each relationship.

7. Development. This is where you can dream a bit. Not everything in this section is based upon pure fact like the information you would have provided in the other sections. Project into the future and think big. Development is a necessary part of business to remain competitive, so be sure to spend a significant amount of time when writing this part of your plan.

8. Financial summary. Now, back to reality! You’ll need to provide a record of your financial dealings, investments, if any, and how you came to the position you are in today. With some flexibility, you can project how your company will be operating and assess your financial status, including how things balance out at the end of each month, the overall financial health of your business and your cash flow.

Enlist Advisors for Your Startup Wisely

Enlist Advisors for Your Startup Wisely

As you build your business, you might need to seek out advisors.

Before extending an invitation to people outside your business to help you grow it, be sure to first think through a few things so you’ll treat them, their time and expertise with respect.

1. Rely on a solid business plan.

When you ask an advisor to help you with your new business, he or she will likely want to see a copy of your business plan to better understand your strategy for entering a particular market.

Ideally you will have already created such a business plan, which can prove that you have an idea worth supporting and might result in your company’s receiving a first round of financing.

You might enlist an advisor to help you write your first plan. (After I wrote business plans for two health care startups, these proposals enabled them to receive first rounds of financing.)

2. Wield your competitive advantage.

Having a solid business plan means that you understand your company’s competitive advantage as compared with that of other players in the market. Comprehending what your company can do better than any other firm will help you demonstrate your startup’s value to your advisor and the market as well.

Providing a sense of the competitive advantage to an advisor will help him or her to know how to best assist your startup.

After creating a solid business plan, you’ll need a creative marketing plan: Your new product or service will not launch itself and you’ll need to find a way to cut through the clutter of the many products and services in the market to inform your target customers why your company is better. An advisor can help you develop one.

3. Plan to compensate advisors.

Don’t ask for expert help before you have a plan to compensate the individuals involved for their time and expertise. When you ask people to commit their time, don’t just plan on telling them that you don’t have a way to pay them or that the experience will be good for them.

Experts are just that because they’ve invested in their education and career. Don’t show them disrespect by assuming that they would work for you for free. Maybe your friends and family will, but an outside advisor often will not.

4. Don’t take advantage of generosity.

Finally, when an advisor offers to help you with your new business, use that person’s time wisely. This includes being organized, communicating regularly and responding promptly.

Experts typically have multiple projects going on and expect to be part of a professional organization, even if it’s in the startup phase.

Financial Guides for Outsourced CFO’s

Outsourced CFO Benefits

Every business needs the guidance of someone who understands finance. But not every business can afford to hire a CFO. Now, many are hiring contract CFOs, who are outsourced and work part-time, but provide all the financial expertise a company needs to thrive and succeed.

How do you know if your business needs a part-time CFO?

• Your CEO is focused on running and growing the business and isn’t a financial expert.
• You want to increase profitability and strengthen your financial condition but are unsure how.
• The business is acquiring or merging with another company, or selling off a division.
• You need to provide financial information to venture capital firms.
• Your accounting systems and processes are out of date.
• It’s difficult to get accurate financial statements, or if you do, no one really understands how to review them.
• Vendors aren’t getting paid on time.

Even though you’re profitable, there’s often not enough cash for new inventory or capital investments.
If any of these statements sound familiar, it’s time to learn how outsourced CFO services can help your company.

A part-time CFO can help a troubled business avoid insolvency and bankruptcy. But nearly any business can benefit when we help in ways such as restructuring the balance sheet to free up cash and make accounts payable current, pay off substantial debt, fund major capital improvements, or fund a retirement plan.

Expert CFO Services without the Cost

Many businesses cannot afford INR 250,000 or more for a CFO salary. Outsourced CFO services give you the expertise of a dedicated CFO, but you’re only paying for part-time, contract CFO services.

You get CFO services you can trust, yet you don’t have to pay taxes,  Whether you need two hours a week or two days, we’ll do what it takes to keep your financial condition strong.

Outsourced CFO Services Summary

Although part-time, your CFO will still be an integral part of your management team.

We will tailor the CFO services to your business’ needs, but the work can include:

• Financial analysis and planning
• Fiscal management and cost control
• Cash flow management
• Business strategy and planning
• Financial projections and reporting
• Customer-focused needs analysis
• Standard operating procedures
• Turnaround and crisis management
• Process mapping and reengineering
• Credit and risk management
• Revenue and margin enhancement
• Interim CFO Services

Perhaps you just need a CFO for a limited amount of time, such as while you’re searching for a permanent employee. We can step in and provide interim CFO services to manage your finances and keep your business on track.

Whether you need CFO services for the long- or short-term, we can help increase your cash flow, profitability, financial condition, and company value.

The 3 Jobs Your Startup Should Outsource

If you’re running an early-stage startup, chances are there are some knowledge gaps in your core team. You may be strong on the technical side or a product whiz, but what about financial strategy, administration, HR? Are you prepared to manage the day-to-day of your startup, from recruiting new talent to bookkeeping to financial planning?

If you have a knowledge gap within the ecosystem of your organization, you need to fill it. But your in-house startup team needs to focus on developing your products and service, creating partnerships, and earning revenue. Your internal resources should be focused on your core competencies, not on these side tasks.

So, what should you do? Outsource — to professional consultants or groups.

The best plan is to outsource whatever services you can so as to save on the highest business costs of all — staffing costs — while getting the support you need and the assurance that these functions are being taken care of by professionals.

Specifically, you can outsource the following 3 functions:

1. CFO: If your company has closed a seed round of funding or is earning more than $250K per year, you need a CFO to handle your financial strategy and run your accounting team. Even if you’re not yet funded or earning significant revenue, you may still be in need of CFO services. For example, if you’re in high-growth mode or have a lot of activity or expenses, you definitely need a financial professional to oversee your financials.

Depending on your needs, a consulting CFO may be able to help with financial projections, cash forecasts, operating budgets, financial plans, pricing, reporting, debt management, M&A, equity and debt negotiations and liquidations. Overall, CFOs help you with business planning, providing your business plan with essential rigor. Your business is creating a product or service; finance is not your business. Look for a professional CFO who has experience working with startups.

2. Accountant: If your financial status doesn’t warrant hiring a CFO, you still need financial support; at the very least, you’ll need help with your day-to-day accounting and regulatory compliance. Outsourcing your bookkeeping to the right firm will give you the support you need for cash management, AP/AR, financial close and taxes.

You can also hire a consulting group to provide accounting support on a project basis. So, whether you need help with audit preparation or generally accepted accounting principles (GAAP), your accounting partner can give your accounting issues the attention they need — so you can focus on other things.

3. Human Resources: Any entrepreneur can attest to the fact that HR can be a total time suck. From recruiting to managing personnel issues, from compensation to benefits, from payroll to employee policies and procedures, human resources management can take over your entire schedule. And HR costs include much more than wages — all HR functions, while non-revenue driving, have an associated cost. Outsourcing your HR functions is definitely a cost as well, but when you calculate it out per employee (and figure on the invaluable savings of staying in compliance) it becomes clear that this is a necessary business cost.

While your company is in its early stages, it’s essential to get support, but only as you need it. To outsource doesn’t mean you just hand over a function and forget about it. You’ll still want to be apprised of all aspects of your startup; hiring the right consulting groups will insure that you stay informed.

Remember, you don’t outsource to make a service disappear; you outsource to reduce your cost structure and keep your internal resources focused on your business. When you outsource necessary functions on an as-needed basis, you can concentrate your internal team efforts where they are most needed: growth. And the companies you hire will help you stay on track as your company grows to the next level.

Get The Most From Your Outsourcing With The Help Of A Part-Time Chief Financial Officer

…make your company look bigger than it really is

“ The worry I have with outsourcing is that I can’t see how 3rd party providers will ever care as much about my business as my own in-house staff ”

The Problem

Outsourcing is nearly always cheaper, more efficient, more effective and more flexible than hiring in-house staff. So why are business owners so reluctant to outsource?

Most entrepreneurs are at pains to develop a team which shares a common sense of purpose and direction. The more ‘in tune’ your team is the more likely your business will succeed.

So the big fear with outsourcing is that you are invariably detached from the people who you feel you need to be close to, which raises concerns about developing a strong cultural fit between your outsource suppliers and your own organisation.

You may be concerned about a loss of control if your staff are not working in the same physical location as you and find it easier to instruct people who are in close proximity. From a pragmatic point of view, not being able to see and talk to your team means you  feel that you are less in control and lack the visibility to spot potential problems and take decisive action.

You may be worried too about the track record of your chosen outsourced provider. Will they maintain the high standards you insist on and deliver quality within the deadlines you prescribe?

Another common concern is around costs: will the prices you are quoted by your provider be set in stone or as the relationship develops will a number of hidden costs emerge (license fees, annual renewal fees, maintenance fees etc)?

How reliable will your outsourced provider be? How do you know that your confidential information, company data and other assets will be safe in their hands?

What will happen if things go wrong with your provider? Are they happy to share a detailed contingency plan with you so that you can feel assured that you will not be hung out to dry in the event that a serious problem arises?

What level of importance does your provider attach to compliance? How can be sure that laws and regulations will be strictly adhered to and that you will not be held liable for infringements?

It is important to ensure that you have a well thought through, strategic approach to outsourcing. A part-time chief financial officer can help to get the right plan in place, ensuring many of the issues outlined above can be overcome and the benefits of outsourcing outweighing the concerns.

You can avoid many of the issues related to hiring and training in-house staff and build a much more agile, flexible and cost efficient business as long as you adopt the right approach. In fact,enlisting the services of an experienced part-time chief financial officer from The CFO Centre is one example of how outsourcing can add value, increase efficiency and maximize opportunities

The Solution

You want your outsource suppliers to possess all the benefits of a high quality, reliable in-house team but without any of the drawbacks. There are never any firm guarantees of success but the right approach can prevent major headaches and save you a lot of money.

The real ‘trick’ with outsourcing is preparation. By understanding in real detail what your requirements are and by spending sufficient time during the selection process to ensure that you find suppliers which share your values and will truly add value to your business (rather than becoming an expensive risk) it will usually follow that you will be build a highly effective outsourced team.

When our part-time chief financial officers help clients with their outsourcing strategy, the process includes:

• Evaluating your company’s current and future requirements
• Discussing a company-wide strategy/protocol for taking on outsourced providers
• Investigating specific outsourced providers (starting with our national network of trusted providers) with proven track records
• Evaluating providers’ core competencies to ensure we find the right match
• Discussing cost implications in detail and uncover any hidden costs before contracting the supplier
• Interviewing providers and ensure they will be a good cultural fit
• Ensuring that the provider will be able to deliver the service on time and to the right standard
• Challenging providers as regards their data security and integrity
• Requesting from providers that they share their contingency plans in the event of serious problems arising
• Evaluating providers’ training programs and ability to support your business in the event of staff sickness or absence
• Discussing providers’ compliance policies to ensure that they will take on the responsibility (where appropriate) to adhere to laws and regulatory requirements

Benefits To The CEO, MD and Senior Team

Cost saving, particularly in today’s economic climate, is a key driver for entrepreneurs and often the number one factor which leads to outsourcing.

There are no requirements to provide outsourced suppliers with employee benefits and you don’t need to spend money on office space to accommodate them.

In most cases you have greater flexibility over costs: instead of having to pay a regular monthly salary you often have the ability to increase or decrease hours according to business demands which means you can operate a leaner, more efficient business and use the savings to drive growth. Your training costs will also be dramatically reduced as these are usually borne by your provider.

One of the other big advantages of using certain outsourcers is the perception it creates to your customers. Smaller companies can often be made to look much larger by taking on outsourced providers which deliver a range of services which would not be possible using an in-house team. This means that smaller companies are able to compete with larger companies as well as react quickly to new trends in the market by finding quality providers who can deliver a high quality service.