Wannabe Entrepreneurs: Stop Fearing Risk

Don’t let fear of failure and losing money stop you from turning entrepreneur. A start-up founder shares her learnings on Costing your business.

By Vandana Chatterjee

Increasingly many women are getting bitten by the entrepreneurial bug. How often do we get feedback from friends and well-wishers that if only we could bottle and sell our skills, we would have a ready market? These skills, when converted into practical working models, have the potential to create huge value for the entrepreneur as well as the economy at large. Among the problems faced by startups in India, the biggest obstacle to starting a sustainable business is  M-O-N-E-Y.

The basic costs every Entrepreneur must consider

At a basic level, all your startup costs will be either fixed costs or variable costs. Fixed costs are those costs that will be incurred, irrespective of whether you have customers or not; for e.g. the cost of registering your firm, renting office space, manufacturing plant or both, buying or leasing machinery and equipment, salaries and utility bills such as water and electricity. Variable costs are costs which increase or decrease with production (or the scale of operations), such as the cost of raw materials needed to produce finished goods, cost of transportation of finished goods or travel expenses per project you take on.

For a first generation entrepreneur, factoring in your own wages for at least a year or two, depending on your business model, is critical to ensuring the success of your venture.

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Add to this, many entrepreneurs give up regular jobs to start businesses, severely impacting their personal cash flows. Given these facts, it is necessary to make projections of your costs, including your own salary, for a reasonable period of time, to get a better understanding of the sustainability of your business. For a first generation entrepreneur, factoring in your own wages for at least a year or two, depending on your business model, is critical to ensuring the success of your venture.

If there is one person in the family with a stable job, or you have savings to fall back upon, it makes it easier for you to survive the first year when revenues may be very low.

Should I start a service business because it is low-cost?

Many women offer professional services such as writing, design, accounting, legal services or consulting in various fields because they have the skills to do so, and also because service based businesses are the lowest cost enterprises to set up and get going. Most services (except some such as beauty salons) need minimal or no investment in office space. Your spare room can double up as a home office and for the most part, all you need is a computer and a mobile phone to start. Manufacturing based businesses are trickier, as in they need investments in plant and machinery as well as skilled workers and an inventory of raw materials.

The other side of the coin is that service businesses find it harder to raise funds as loans from banks and financial institutions as they have nothing to offer as collateral. Manufacturing set ups on the other hand, can raise funding relatively easily by hypothecating their plant, machinery, inventory or work-in-progress. Service based businesses can also be harder to scale up, depending on how niche your offering is, and whether you can hire other professionals to help if you want to grow.

What costs do Entrepreneurs forget about?

If you plan to run your business on borrowed funds, the interest payable on these loans along with capital repayment has to be catered for. Several entrepreneurs, in a self-congratulatory mood over getting funding, tend to overlook loan repayment charges.

Several entrepreneurs, in a self-congratulatory mood over getting funding, tend to overlook loan repayment charges.

Another cost that most entrepreneurs omit to budget for is payment of taxes (service tax, VAT, sales tax and other applicable taxes). A new regulation has made it mandatory for service providers to file service tax as soon as an invoice is raised. This could create severe working capital challenges for startups in this sector. Budgeting for this crucial element (10.3% of invoice value) is critical for the success of your business.

The key to success in starting your business and making it a profitable venture is doing your homework meticulously, working inflation into cost projections, keeping avoidable costs to the minimum, looking at low cost ways of selling your products, and working at creating a scalable model, i.e. a way of working that allows you to quickly increase your delivery capacity to match demand. Research your sector and government subsidies and incentives for entrepreneurs, especially women entrepreneurs carefully. There are tax holidays and waivers available for the taking, even though they are time bound. Get registered as a Micro, Small or Medium Enterprise. Some of these registrations come with huge cost benefits and advantages.

Most importantly, don’t look at your business as a high risk venture. Gambling is a high risk venture, not business! Do your homework, rationalize your costs, balance your budget (even though at times it will be extremely stubborn) and take educated risks. The feeling that your company, however small, makes a difference in the lives of your employees and your clients is the biggest dividend you take home at the end of each day!

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