I am not much of a finance person. There is only one aspect I always pay attention to – tracking cashflow. Because if there is one sure way a business dies, it is due to lack of cash. I cannot read financial statements and haven’t bothered to learn how to analyse balance sheets and profit and loss statements. But what I always track is the cashflow. Without cash, you cannot pay salaries or vendors. And that creates a negative spiral from which it can be very difficult to recover. Pawan Gadia agrees. “Because of the kind of business we are in, we get the payment first and then we pay our creditors anywhere within 30 to 60 days. This allows us to have enough cash flow available to deploy, that is, we get paid by our customers before we need to pay our vendors. Now, we are very clear about our aspirations, but we focus on being profitable as well as being on this path,” Gadia explains.

It is possible to be profitable and yet have cash challenges if you do not get your payments on time. In India, this is especially difficult because of four issues. First, customers take their own sweet time to
pay – 90-120-150-day payment cycles are not uncommon. Second, salaries, rents, and even some vendors expect to be paid on time, that is, within 30 days. Third, statutory payments to the government have to be made on schedule. Fourth, because of a delay in court rulings in India, higher write-offs are a reality of life. After all, justice delayed is justice denied.

What this means is that the business needs some working capital for 60–120 days. That can either come from past profits or one has to raise it externally. Growth also requires deploying additional capital since there is a gap between money coming in (later) and money going out (early).

Many first-time entrepreneurs think that once a bill is raised, the cash is in the bank. This is not true. Incoming payments are delayed and a small percentage may not even come in. Thus, to ensure that the business does not run out of cash, there needs to be money in the bank to cover at least four months of future expenses at any point of time. That is why at IndiaWorld, I was very keen to make the business cashflow positive as soon as possible – ensure that there was adequate money in the bank to meet all future expense commitments.

In the early days, subscriptions and website development fees sustained the business until advertising
took off. We kept a sharp eye on our cashflows to ensure we never would get squeezed for cash. I had learnt these lessons in my childhood, writing a daily cash diary for my mother. Each month, my father would give her a certain amount for household expenses. At the end of each day, she and I would sit and write down all the day’s expenses under different headings and calculate the amount left for the month. This way, there would be no surprises until the next cash inflow came when my father got paid at the start of the following month.

No proficorn can be built without attention to cashflows from the early days. Once there is a cash buffer available, keep it safe in liquid investments so it is always accessible. Take the risks in business, but not with your hard-earned cash.

Take the example of Ferns ’N’ Petals, which focussed extensively on ensuring each transaction is profitable and the cashflows are managed diligently. “We had a simple rule. Whenever we wanted to sell anything new online on fnp.com, it had to have a 50% margin and it should be giftable. It’s not for self-consumption. With these two rules, it becomes easier for us in building this entire category and keep a very, very tight control on any kind of costs,” Gadia says. This rigid focus on profitability and cashflow management helped Ferns ’N’ Petals grow.

As a proficorn, one always has to look at controlling costs. Ferns N Petals learnt this the hard way when they entered into the Quick Service business. “We realised that we can replace the flower shop model. What we did not realise is the cost of producing centrally and the cost of paying rent for 24 hours while the revenue was only from 3-6 pm. We burnt a lot of money, but it almost took us down. So we cut that business,” explains Pawan Gadia. Today, the top management of Ferns N Petals meets every alternate Saturday to leisurely discuss one of two things – ways to increase topline or reduce cost.

CitiusTech, which provides healthcare products and solutions globally, too looked at interesting ways at reducing costs. “Sales is a big cost, especially international sales. So, we figured out that we could dramatically reduce our cost of sales if we cracked conferences. We would sign up to attend healthcare conferences. We would print out large maps and booths and learn it almost by heart. Before every conference, we could close our eyes and tell you which booth is where. Once the conference started, we’d have like 60 meetings over three days. The same 60 meetings would take you one year to fix otherwise,” says Rizwan Koita.

That said, here’s the flip side. The question is always about how far you should take the focus on costs. I remember what my uncle, who runs a hospital in Pune, once told me years ago. He said, “Accept that there will 2-3% chori (theft) in the business. Factor that into your costs. Don’t try and focus on that. If you keep trying to find the chor (thief), you will put so many control points in the business that it will become unmanageable.”

In most businesses, theft is perhaps too strong a word. I like to think of it as costs that are wrong but difficult to identify. It could be as simple as vouchers filled by sales people for meetings that did not happen. It could be some items bought at prices higher than they should have been. There are many ways such costs happen. The key point my uncle was trying to make is that accept that there will be a small percentage of such expenditure and get on with life. In an effort to control each and every rupee spent, the entrepreneur can get so bogged down that the bigger focus and perspective will be lost.

Keeping a tab on costs is critical, but one cannot make it an obsession. I have always been cautious on big bets – especially when it comes to marketing spends. The focus needs to be more on the product. At IndiaWorld, I put a press release and an advertisment when we launched. That was it. My belief was that if the product (in this case, the content) was good, word-of-mouth would help us grow. Advertisements could get someone in the first time, but after that, it is the product that has to bring them back the second and third time. I was confident of our product. And that worked out well – sites like Samachar, Khoj, Khel, and Bawarchi grew because of the strong word-of-mouth marketing by happy customers.

Even as one tracks revenues and cashflows, an entrepreneur needs to keep a check on the costs up to a point. Don’t try and optimise every cost. Else the functioning of the business will get paralysed. Eventually, most costs can be justified if there is strong business growth. Until then, trust and verify.

Excerpted with permission from Startup to Proficorn: A Private, Bootstrapped, Profitable, and Highly Valuable Venture, Rajesh Jain, Jaico Publishing House.