Steve Jobs and Sir Richard Branson are my business gurus. They both have touched the epitome of entrepreneurship and have made this world a better place with their respective innovations and enterprising spirit. Yet, their style of entrepreneurship has been poles apart. While one followed an authoritarian way of leadership, Sir Branson followed an inclusive approach to entrepreneurship. Mr Jobs builtt the world’s best product company, while Sir Branson has set a record in the service business line. Irrespective, both have followed certain basic financial modalities, that are worth a mention and discussion for the new generation of entrepreneurs.
Financial advice 1- Funding is not the business: I have met many start-ups in past years of my own entrepreneurship. In fact, we work with a few and they have one main clear goal, how to raise the next round of capital. There is a race for valuation and to maintain the valuation. Parties are thrown when a funding round is complete. Business is just not about funding. It is about how those funds are put to use and what is the value generated by putting the right level of capital into the machinery of your business idea. Heavily funded business with high valuation and deep-rooted negative profits are a bubble that would burst, similar to the 2007 crash. The only difference is that the asset class would be different. My advice is to focus on product/ service delivery, quality, reach to market and all keeping in mind the bottom-line. Not every business is Amazon, Alibaba, or Flipkart.
Financial advice 2 – Focus on the top line as well as bottom-line: Carrying forward advice #1, do not get carried away only by the increase in sales. An increase in sales should often lead to an increase in the profitability of the business. As an entrepreneur, there is no pride in increasing the losses of a company and burning cash. Remember the vision of why you started the enterprise and stick to it.
Financial advice 3 – Plan global taxes: I have been propagating the concept of Effective Tax Rate in many of my discussions. Tax planning is legal and something that is also encouraged by the Government itself. Gone are the days where business was undertaken in one country. Now with multiple jurisdictions playing role in the supply chain, as an entrepreneur, you should plan your supply chain in a way where taxes as paid as per the value created and you focus on lowering the effective tax rate on your business. Use transfer pricing to your benefit to assigning the right values to the value chain so that the impact of taxes is optimised. Transfer pricing policies could be of great help to multinationals in this case. Tax is a cost of doing business and it needs consistent planning and monitoring. Be compliant and stay away from litigious tax positions. Please note I am nowhere advocating tax avoidance or evasion. Every business has the right to plan its affairs in a way where it can optimise its tax burden to pay the right level of taxes. Choose your transfer pricing advisors wisely.
Financial advice 4 – Take the right financial advisors on the board: Consultants and advisors are like a vaccine. Their specialisation would help your business building immunity in mitigating various risks and the businesses can always learn from the advisor’s experience. Always keep trusted and good advisors by your side. Do not get carried away with big brands. Plan on things before you execute. This helps to bring down the risk of any kind and you would get the right advice at the right time. Be meticulous with financial records and maintain financial hygiene in terms of book closures and financial audits. Keep up the trust of shareholders/ investors/ lenders/ suppliers and customers. This all can be achieved by investing in the right set of advisors at the right time.
Financial advice 5 – Manage cost and do not control or cut it: The trickiest part of the business is cost. If you do not incur the cost, the business would not grow. If you overspend, the profits would be wiped off. Recently many entrepreneurs saw a roadblock with pandemic hitting. The first thing that enterprises did is that they picked up an axe and cut off fixed costs. This included employee salaries, rents, overheads etc. There was another type of entrepreneur, which pivoted towards an alternative strategy and instead of cutting cost, they managed the costs or consolidated the spending towards something that could transform their business world. For a business to sustain itself, there is a certain level of cost that is important to be incurred. Similar to tax cost, all cost function needs management and therefore before you pick up your axe, think if you could use a better tool to address the issue on hand.
In conclusion: Build-in financial literacy and keep walking through the business basics. I am confident that as an entrepreneur you will walk the path of success.
The author could be contacted at akshaykenkre@transprice.in