Tech startups are companies founded to develop a unique technology product or service with the potential for significant growth. They typically focus on innovation and scalability in the technology sector, attempting to fill a gap in the market or to offer a novel solution to a problem. Startup is the establishment of an idea into reality.
Why Tech Startup needed?
1.Job Creation: Addressing Unemployment Concerns:
Tech startups are becoming big job creators in India. In 2023, they directly employed more than 10.34 lakh people. This number is likely to go up in the future, which is good news for the country's job market. The fast growth of these startups is creating lots of new job openings, especially for young people who are good with technology. These jobs cover a wide range of areas like making software, analyzing data, marketing, and helping customers.
2.Skill Development And Upskilling: Nurturing A Future-Ready Workforce:
Tech startups in India are not only creating jobs but also helping people learn new skills. They offer training programs to teach their employees about the latest technology and industry trends. This focus on learning is important for preparing workers to succeed in today's digital world.
3.Innovation and Entrepreneurship: Catalysts For Economic Transformation:
Tech startups are leading the way in coming up with new ideas and technology that change how things work in different areas. This innovation is helping the economy grow, creating new types of businesses, and making India more competitive globally.
At the same time, these startups are encouraging more people to start their own businesses and help the economy grow.
4.Global Recognition And Foreign Investment Influx:
Indian tech startups are becoming well-known around the world, and this is bringing in a lot of money from other countries and creating partnerships with international companies. This money is helping the startup community in India grow, allowing them to do more, reach more customers, and help the economy even more.
5.Challenges And Opportunities: Navigating The Path Forward:
Even though Indian tech startups are doing well, they still have some problems like getting enough money, especially when they're just starting out, and needing rules that help them.
But there are more chances for them to do well than there are problems. Programs like Startup India from the government give them important help. Also, as more and more industries use technology, it gives startups a good chance to succeed.
Financial Planning tips for Tech Startups:
1.Establishment of an Idea
Startups are basically started with an idea and a confidence to convert it into reality or to admire a common problem that everyone is facing, to resolve that problem, an idea generates in entrepreneur’s mind. There are many unicorn tech startups in India which either started from an innovative idea or by just admiring Top of Form People common problem.
2.Create a Detailed Budget:
A budget is really important for startups because it helps them keep track of their money and decide when they need to make changes. This helps people who work in management at startups figure out the best way to use their money to make as much as possible and stay financially healthy. If you're in a management position at a startup, knowing how to make a budget can help you make smart decisions about money.
Points to create a budget for a startup:
- Calculate the Initial cost to open a tech startup: At first, we need to determine the initial cost to establish a tech startup which includes cost of material and supplies, Facilities cost, revenue expenditure and capital expenditures, technology startups etc.
- Estimation Company’s monthly sale: For this you have to consult a financial advisor because you cannot choose your own estimation of sales. When you estimate your sales you know what you have to invest.
- Determine the company’s fixed expense: For a budget of a tech startup, you have to determine the fixed expenses like Rent, Utilities, Website maintenance, Office Supplies, Professional fees etc.
- Determine the Company’s variable Expense: For a budget of a tech startup, you have to determine the variable expenses also.
- Add the start up total cost: By adding the total cost, you can have the budget to open your tech startup. If the expenses go above the budget you can think before borrowing your capital or making adjustments in your expenses.
3.Monitor Cash Flow:
For a tech startup It is mandatory to monitor its cash flow.
Cash flow, which refers to the net change in cash and cash equivalents, is a vital metric for startups. It indicates the balance between money coming into the company and money going out. This includes the cash the company currently holds and its capacity to take on additional debt.
Startups can calculate cash flow in three main ways:
1) By subtracting expenses from revenue (gross profit) for each month of the year.
2) By totaling all costs incurred in a given year.
3) By totaling all revenues received in a given year.
Calculating startup cash flow is crucial for several reasons. It provides insight into the company's available cash, highlights areas of excessive or insufficient spending, and determines the company's financial viability.
Maintaining Cash Flow:
Here are some tips for managing cash flow in your startup:
- Calculate cash flow by tracking both money coming in and going out of your business. Understand your incoming revenue and outgoing expenses.
- Keep a close watch on your expenses and aim to minimize them to maximize your profits.
- Make sure you have enough working capital to cover your expenses for at least three months. This is important because it can take time for your business to start making enough money to cover its costs.
- Remember to account for taxes, which can be a significant expense for startups. Since new businesses may not have generated enough revenue yet, it's important to plan for these tax payments carefully.
4.Bootstrap Whenever Possible:
Bootstrapping in business means starting and growing a company using only the resources you already have, like personal savings, your own computer, or space in your garage. Instead of getting money from investors or borrowing money, you use what you already have to make your business work. It's about making the most of what you've got to get things done.
Financial Bootstrapping:
Different parts of a company can be managed in a way that makes the most of what the company already has. On the financial side, this means keeping costs down and avoiding paying too much for anything, or paying too early. Here are some ways to do this:
1. Hold off on renting office space until it's absolutely necessary, like when you start hiring employees. Consider low-cost co-working spaces first to keep rental payments low.
2. Don't spend a lot of money on fancy office furniture and equipment. Buy used items or, if it's suitable, lease them to save money.
3. Trade with other companies to get what you need, whether it's products or services. This helps save cash.
4. If suppliers offer a discount for paying their bills early, prioritize those payments.
5.Diversify Revenue Streams:
In today's unstable business climate, depending solely on one source of income can be risky. Economic downturns, technological changes, and shifts in consumer preferences can greatly affect a business's main way of making money. Diversification isn't just a plan; it's a way to protect against these uncertainties.
By diversifying, businesses can reduce risks, reach new groups of customers, and guarantee a steady flow of money, even if one source of income doesn't do well.
Let’s take examples of some big giants Tech Companies:
Apple: Let’s see the business model of APPLE, This tech started it business with Computer manufacturers, It’s diversification journey is magnificent. Then they ventured into music business iTunes, then with mobile manufacturing iPhone, and then they entered in the wearable like Apple watch, Now they are not just a tech company, APPLE is the lifestyle.
Amazon: Amazon started its business as a online book store, then they ventured in cloud computing with AWS, and then in entertainment sector launch its OTT platform Prime Video, and now in the groceries business with their acquisition of whole foods. Amazon diversification story is also magnificent.
Strategies for Effective Diversification:
- Market Penetration - Go deeper into your current market. Offer new versions of your product or provide more services to your current customers. For example, a restaurant could start offering catering services.
- Product Development - Come up with new products or services for your current market. Listen to what your customers say to get ideas. For instance, a software company could make new products that work well with what users want.
- Market Expansion - Reach out to new markets or groups of people. Think about growing into new areas or focusing on a different age group, gender, or industry. A product that's popular in one place might also do well in another.
- Alternative Channels - Try out different ways to sell and distribute your products. If you mostly have physical stores, think about going online. Or if you're an online brand, you could benefit from having a temporary physical store.
6.Invest in Scalable Technology Infrastructure:
Infrastructure scalability means making sure that your system, network, or app can handle more work, traffic, or demand without causing problems with how well it works, how dependable it is, or how users experience it. Basically, it's about making sure your technology setup can smoothly get bigger as your business grows.
Fintech Example: Online Payment Platform
Let's say you're in charge of a fintech startup that offers an online payment platform. At first, you have a small number of users, and your system can easily manage the transactions. But as your platform becomes more popular, the number of transactions shoots up.
Challenges:
Server Capacity: Your current servers might struggle with the sudden increase in transactions, causing delays or even crashes.
Load Balancing: Without proper load balancing, some servers might get overwhelmed while others aren't used enough.
Database Scaling: The database storing transaction data might become a problem, slowing down how fast transactions are processed.
Solutions:
Horizontal Scaling: Add more servers to share the load, using load balancers to spread out the traffic evenly.
Vertical Scaling: Upgrade your servers to handle more transactions.
Database Scaling: Divide the database into smaller parts to spread out the data and make things run smoother.
7.Plan for Contingencies:
A contingency plan is a written document that explains how your start-up business will handle unexpected events, like emergencies or disruptions. Having a contingency plan can lessen the impact of these events on your business operations, finances, customers, and reputation. It can also help you bounce back faster and get back to normal. In this article, you'll find out the most effective way to make a contingency plan for your start-up business.
Tips for making Contingency Plan:
- Identify potential risks: The initial stage in forming a contingency plan is to recognize the possible risks that might impact your start-up business. These risks may encompass natural calamities, cyber breaches, legal disputes, issues with your supply chain, shifts in the market, or loss of key personnel. To evaluate the probability and seriousness of these risks, you can utilize various techniques and tools like SWOT analysis, PESTLE analysis, or scenario planning. It's also important to seek input from your team, stakeholders, and professionals to gain diverse viewpoints and expertise.
- Prioritize and categorize risk: The following stage involves ranking and organizing the risks according to their significance and immediacy. Utilizing a risk matrix, you can map out the risks on a spectrum from low to high probability and low to high impact. This will assist in identifying which risks require greater focus and resources, and which ones can be overlooked or acknowledged. Additionally, you can classify the risks into distinct categories, like strategic, operational, financial, or reputational, to simplify the assignment of duties and actions.
- Develop contingency strategies: The third phase involves creating contingency plans for each risk or group of risks. A contingency plan is a course of action detailing how you will prevent, alleviate, or address a specific risk. It should outline the trigger, goal, steps, resources, responsibilities, and timeframe for success. The trigger is the event or sign indicating the need to activate the plan. The goal is the desired result. The steps are the specific tasks that must be done. The resources are the human, financial, or material assets needed to carry out the steps. The responsibilities are the individuals or teams responsible for completing the tasks. Finally, the timeframe sets deadlines or milestones for finishing the tasks.
- Communicate and test the plan: The last stage involves communicating and assessing the contingency plan. You must distribute the plan to your team, stakeholders, and external collaborators, ensuring they grasp their roles and responsibilities. Additionally, provide training on plan usage and furnish necessary tools and information. Furthermore, regularly assess the plan's efficacy and feasibility through simulations, drills, or audits. Update the plan as your start-up business progresses or as new risks surface.
8.Regularly Reviewing and Updating Your Business Plan:
A business plan is a crucial paper that lays out the objectives, tactics, and steps for a company. It acts as a guide that directs the path and expansion of the business, offering a plan for decision-making and resource distribution. Your business plan must adjust to the shifting surroundings and developing requirements of the company. This article talks about the importance of routine business plan assessments and revisions and how they add to the long-term triumph of your organization.
- Staying Up-to-Date with Market Shifts.
- Evaluating Performance and Establishing Fresh Objectives.
- Adjusting to Internal Changes.
- Preparing for Future Opportunities.
- Encouraging Continuous movement.
Conclusion
In conclusion, implementing sound financial planning strategies is vital for the success and sustainability of tech startups. By prioritizing careful budgeting, seeking expert financial advice, leveraging available resources, and maintaining flexibility, startups can navigate the challenges of financial uncertainty and position themselves for long-term growth and success. With a clear understanding of their financial landscape and a proactive approach to managing resources, tech startups can build a solid foundation for achieving their goals and fulfilling their potential in the dynamic and competitive market landscape.
Article written by
Ayush Gupta a legal Trainee at Corpzo
