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Lessons for a 1st Gen Entrepreneur – Managing cash flow

I had often heard of the importance of cash flow and thought that I had taken adequate steps in year 1 to guard against running dry. But, when a fully charged technical team is at work, minor details like cash flow are sometimes temporarily ignored or wished away till reality stares you in the face.

I guess until you reach the brink, you never realize the true importance of managing cash flow. There was one VC I met around the same time we demoed at Proto that gave me the words of wisdom – “If you truly believe that your idea will work, you will have to make it work yourself”.  

Until then, I guess my vision was clouded by the wish that some angel will give us money to take us from lab to market. “Save” is a better word, I now ponder. 

Spurred to action, we got cash started by consulting. We continued to fund the technology development, but choked it enough to remove any inefficiency that might have crept in. Consulting revenue grew rapidly (we were good), but, with growth came larger cash flow management challenges. 

I guess it is true that when faced with challenges, solutions come from unexpected quarters. In an earlier assignment, I had worked with State Bank of India and helped customize an Aussie banking system to match SBI’s products. One such product was called Packing Credit – a revolving receivables financing product tailored for export business and subsidized by the Government of India to enable SME organizations generate more export revenue. 

Armed with the knowledge of structuring a proposal for credit with a PSU Bank, we got a healthy overdraft sanctioned at a very decent rate of interest. Thanks, Canara Bank. Funding growth based on booked business was now not a problem. 

The other big advantage of going through the process of getting credit sanctioned from a PSU Bank is the rigors of reporting they put you through. Added to this were the really well thought of clauses within the Packing Credit product which spurs the business availing this credit to constantly (every 90 days) get fresh business into the system.  

Once the concepts of finance take hold of the running of an organization, I guess it’s in the right hands.

  • http://www.kmonyb.wordpress.com Krish

    Packing credit (PC) is indeed a boon when you have fairly robust domestic business growth that entails predictable cash flows. `Domestic’ includes customers from Nepal and Bangladesh where billings can be in INR.

    If your business spans across other geographies, PC exposes you to exchange risk besides default risk and interest rate risk. Most often overseas SME customers do not enjoy documentary credit (L/C, Bank guarantee) facilities from their banks. They would insist on direct remittance when he/his bank receives the shipping documents (D/P -documents against payment) but would be willing to accept a price mark up. Startups often face this problem particularly since they can’t drive hard bargains with many a early customer without risking the order itself.

    So, in volatile times like this, prudent cash flow management necessitates a balanced pricing strategy that covers any adverse currency movements (during the 90 day period)- an area where even some established corporates had to bear the brunt. So cushion up !

    Then there is also suppliers’ credit / buyers’ credit that you can lean on depending upon the facts of your specific case. But in these times of high cost bank finance, nothing to beat the old fashioned cash discount – that allows you to minimise risks, lets you feel the warmth of sheaf and most importantly allows you many a good night’s sleep;)