Where goes my money??
A new business hub might seem like a hell of an idea! The product created here could be absolutely riveting. But is it making money or simply losing all down the drain, like so many others. How??
Recently, in an interview with Tech in Asia, Navneet Singh, PepperTap CEO, said, “Since we operated on a negative margin per delivery, the path to profitability looked very distant- at least two to three years.”
While start-ups manage to receive funding from eager investors, they often cannot sustain themselves in the long run. No wonder then that Gurgaon-based PepperTap, in 2015 grossed $50 million in funding yet they soon had to shut shop.
Clearly, such companies have not learnt to manage their finances. Hence, they should always be on the lookout for their successful counterparts to avoid common financial bloopers.
Here goes some of the common mistakes committed by many start-ups:
1: Incorrect revenue model
That incorrect revenue model is the most common financial mistake for the start-ups is definitely a no-brainer. Such companies often tend to focus on their big business ideas or innovative services and products, while completely ignoring the aspects on fund-generation or the ways to sustain post the initial capital infusion. Once the initial bootstrapped funding or investors’ money runs out, starts ups with a sub-optimal revenue model tend to get cash-strapped, which could often lead to cash burnout or even an exit.
2: Least attention to cash flows
While a startup might be bringing in revenue, yet without an adequate cash flow the financial health of the venture is not certain. Revenue could be organized on credit but employee salaries and vendor payments cannot be taken care of based on recognized revenue alone- which definitely needs sufficient cash inflows.
While there is too much focus on revenue at the cost of cash flows, companies often commit blunder by banking on scale to generate cash. One could just look at grocery startup Grofers which had to curtail its expansion plans once its customer acquisition costs started ballooning.
3: Misplaced assumptions
Often would-be entrepreneurs fail to stay grounded while trying to float their ‘big ideas’ to lure funders. While Mumbai-based on-demand laundry startup Doormint began with verve and promise, pretty soon, however they failed to meet their operational costs at the price they had launched the services. The founder’s had not accounted for the local dhobi’s cost-effective and convenient servicing while stacking up their business assumptions.
4: Wrong hiring
Wrong hiring has two dimensions- both of which could hurt startups in the long run. While the first mistake is hiring more than the number of essential employees required for running operations, the second is to offer higher salaries to attract better talent. Startups, even if sufficiently funded, should not forget that they are still startups and going overboard with wrong hiring will in fact boomerang and impact their financial health sooner than later.
5: Focusing on sales and not profits
Businesses need profits to grow and sustain. However, many startups focus more on revenue than profit, which eventually lead them to high losses, sometimes irrecoverable. Hence, it is very important to strike a balance between sales generation and profit.