Things to avoid when starting a new business!

  • Home
  • Things to avoid when starting a new business!
  • ;

Things to avoid when starting a new business!

Date: 8 Jul 2020

There are few common but cardinal errors of judgment entrepreneurs make at the start of their journey or foraying into a  project/venture. The chances of success can increase manifolds if an entrepreneur avoid committing these mistakes. We attempt to highlight these in this post and suggest ways to avoid these pitfalls.

  1. How much investments do you require? :

Seed capital is the initial money which a business owner is required to invest while establishing a new project and its amount depends on the project size and other factors. It is a key and critical component of the project as the businesses run the risk coming to a complete halt for inadequate funds. Let us understand what it takes to make a reasonable estimate of financial contribution:

  1. Initial Losses: Be aware and awaken to the fact that business doesn’t start making profits from day one and there could be initial losses before the business starts generating profits. These initial losses have to be contributed by the promoters and as a prudent businessman these are required to be estimated as a contingency plan. Remember that the lending institutions are as support and in case of initial hiccups it’s our money that will help you to sail through.


  1. Overlooking Working Capital: The mainstay of a new project is the Capital expenditure and it is being looked into great details and depth. However generally promoters fail to give equal attention to the working capital planning. Working capital assessment is a critical component of the financial management once the business commences its operations. The jugglery between creditors, inventory and debtors spans out in due course of time and may not confirm to the estimates. While we plan our budgets as per averages of the industry but it takes some time to reach those levels at the start. Hence the working capital requirement could be very high as compared to plan.


  1. Industry specific planning: There are certain industries where the minimum threshold start remains high both in terms of required infrastructure and outlay of funds. Few industries have a long receivable cycle or few work on advance or cash purchases, so it is important that an Entrepreneur to have an understanding of such industry specific requirements. Otherwise once this is not taken care of at the initial planning stage, businessmen try to match their capacities with the market and are always short of the requirements.


  1. Delay in Execution: Keep the timelines intact in starting a new Business is a herculean task. The planning is done in terms of weeks and months but actual progress does not adhere to these calendar tasks. Since delays are costly, the expense keep accumulating and create pressure on the promoters. These are to be incorporated into the business planning and sufficient contingency needs to be provisioned for them.
  2. Cost Overruns: “Man proposes and God disposes” goes true for putting up new projects or businesses. The costs generally escalates on account of delays or for some unexpected expenses. While these cannot be planned for but an informed business owner keeps room to accommodate these overruns to make a full proof project and mitigate risks.
  3. Role of Bank finance: The common practice of the entrepreneurs is to believe that bank will buy their business idea and fund a substantial amount on the basis of projected cash flows. However this belief remains elusive from reality as the fact remains that bank finance is a support mechanism which funds only a part of the project. The entrepreneur needs to be on the top of the numbers and should plan for a sizeable own funds while look for bank support for the balance amount. Raising debt from financial institutions is also an important task and require a methodology to be followed. This shall be covered in a separate article.
  4. Excessive funding:Different projects have different payback period and ability to attract financiers or investors. Hence even though the Banks might have similar criteria for different businesses, what works for one business might not work for the other? Just because the Bank is willing to give us a loan, doesn’t mean that it should always be taken. Sometimes the promoters keep taking loans from the Bank and they ignore the high risk of Financial Leverage in their Business. The business might be profitable, but might not be able to service the excessive debt. Hence the level of Bank Finance need to be kept at an optimum level.
  5. Think Big but Start small:

We come across many entrepreneurs who leave large organizations and aim to start their Entrepreneurship Journey utilizing the years of corporate experience. They have grand dreams and energy but they find themselves in a different ocean where the comfort and largesse of an established organization seems missing. To make up for this shortfall, they try to create a similar Infrastructure in their Startup Venture. This comes at a cost and lead to unwanted expenses which could be avoided. The entrepreneurs need to ask themselves before outlaying expenses (especially civil work) if this is absolutely necessary to meet the goal. The crux of the matter is to start with a minimal infrastructure and avoid heavy Capital expense and create an asset / debt light enterprise. During the journey you can build upon these resources and reach where you had planned to reach.

  1. Plan-Plan-Plan and then Execute:

Ideas and passion to convert them into a real business is what makes one an entrepreneur. The idea behind his/her start is so compelling that one wants to act immediately. But they need to ask themselves – Am I prepared for this? The initial preparation and planning is very critical before you start action on the ground. So there are some preconditions to be met before jumping to action. These include verifying your idea within a closed group, analyzing the current market offerings, identifying co-founders, making a business plan, plugging capital and so on.

  1. Understanding Financial Management:

In the haste of hitting the ground , large no of promoters invest all their money in initial set up and soon find themselves short for working capital financing. Now they approach the Bank who ask them to contribute 25% – 40% of Working Capital sought by them. But they are already short of funds and fail to understand, why they should contribute any more (since they already have invested much more in creating the infrastructure) . This is where the understanding of financial management and banking could help promoters to make the right start. While not all entrepreneurs could be well versed with finance but they could always seek professional advice on this aspect in the planning phase.

  1. Avoid looking at the risks:

The Entrepreneurship Journey starts with a lot of enthusiasm and hence risks are pushed aside since they seem to challenge the very dream or idea behind the start. Generally, the Entrepreneurs tend to avoid looking at the inherent risks involved in their business. While risk is an integral part of the business but understanding the risks involved helps in taking informed decisions. Hence entrepreneurs need to lists the risk they foresee and plan mitigates which will help them grow.

  1. Delegate tasks

Entrepreneurs do have an inclination towards perfection and that is what makes them do things differently. However the startup journey is all about creating a team who can execute tasks for you but may be not with the same quality as you might do. Then should you hire talent of your or try doing things yourself? The former option has cost implications besides other issues and the latter puts you in the dock where you find yourself doing routine firefighting. So the right approach is to delegate routine tasks within the team, seek professional support and outsource routine but important tasks and finally keep yourself free for strategic decision making and monitoring the function of the enterprise.

  1. Don’t ignore Compliance:

The era where non-compliance did not cost much is a matter of past and the times have changed. Even routine non-compliance can lead to shutting of a profitable business. Further the non-compliance makes you appear weak in terms of corporate governance and deter investors from investing in your business. The Business may tick all boxes yet may fail miserably in the Due Diligence. The current ecosystem has limited tolerance to non-compliance and it requires a disciplined approach to keep stakeholders like the Banks, investors etc besides govt authorities satisfied with Statutory compliance. Hence keep a close watch or hire professional support to keep your business complaint with the regulatory and statutory laws.

  1. Managing a proper Accounting system:

Many times the Entrepreneurs start incurring expense from their personal accounts but forget keeping records of bills etc., frequently make expense in cash and there is inadequate recording of expense. This becomes a big problem with Banking, Compliances and the MIS. Management gets inadequate information to be able to make any decision. It is very important to create a structured system of Accounting right from the start of an enterprise.

  1. Formal/Contractual Agreements:

Most ventures need partners and the partnerships generally start among known people when the beginning is high on emotions. The partners know each other as a friend, relatives, colleagues and they don’t think it is necessary to enter into a formal agreement. Since there is no agreement, lack of clarity on various aspects lead to conflict which could have been avoided had there been formal documents in place. Situation where partners want an exit are common, but since an exit mechanism was not formalized while entering into partnership, matter converts into conflicts. It is difficult to think of divorce at the time of marriage and the same holds true for partnerships. Any conflict among partners can have adverse effect on an otherwise profitable business.

  1. Lean Fixed Cost Structure:

Initially the business face a lot of uncertainty and they might not be able to bear the high fixed cost structure. Therefore the Business need to plan the initial operations in a way that the fixed costs are lower and the emergency exit should not be too costly. For example: Instead of hiring many employees, the company might hire critical employees and outsource non-critical activities. The Company might attract key staff with flexible cost structure instead of fixed pay. Instead of buying the assets, the company might plan for some assets on lease, if possible. The idea is to keep the fixed cost to the minimum.

  1. Choosing right professionals to work with:

Low-cost is not always low –cost and might end up expensive at times. This holds true specifically in terms of engaging professionals by an Organisation. A right professional always provide more value than the cost charged, hence not choosing the right professionals to work with the company might cost a lot to the Company.

  1. How to End the Start?

The last but not the least important point is the closure of business. We start as if there is no end , but there are unforeseen circumstances which require closure of the business operations. However partners need to understand that closing an enterprise follows a formal procedure. No body likes death, but we need to understand that just like the rituals are necessary on the death of a person, we can’t just leave him to degenerate, likewise the Business also need formal closure. Ignoring the closure can lead to hefty penalties or even prosecution of promoters at the later stage. Hence improper closure is one such mistake every entrepreneur should avoid.

error: Content is protected !!