Financial risks for start-ups and how to avoid them
By Keith Tully / AMEinfo
As an entrepreneur looking to take the sea by storm in the UAE or introduce a new service to the Bahraini financial market, there are risks which can set your business back. This can threaten cash flow, asset value and the lifespan of your newly fledged business.
Amongst financial hurdles, there are cross country restrictions, geopolitical influences, international relations and your rights as a local resident or expatriate worker to consider. Here are some of the risks you should be aware of as a start-up:
Dangers of under trading – missed opportunities
Under trading is typically the reverse of over trading; a risk which is not commonly touched upon when discussing financial dangers for newly established businesses. This is a common pitfall associated with start-ups who are less trigger happy and unwilling to take risks with money. This could eventually lead you into a compromising position due to missed opportunities which could have blossomed into profitable trading deals for your start-up.
Under trading is when resources are ineffectively used, or not used at all due to being overcautious, which can directly lead to falling sales. Inadequate working capital can also result in under trading as if you fail to fuel your business with sufficient funds, you will inevitably hit a financial wall.
Overtrading – A successful, yet deteriorating start-up
The rush of adrenaline when sales are rolling in, profits are leaping and customers are rapidly increasing can feel risk-free and pleasurable, as does the income boost. There is a fine line between success and overtrading which start-ups should take heed of. If a start-up expands too quickly by taking on more customer orders than it can handle, this can take a toll on your cash flow.
An influx in trading requires greater resources and manpower which can create a gap in your working capital. In this situation, it is vital to make accurate cash flow forecasts and take out credit to inject extra cash into the business. The start-up should accumulate enough money before it commits to spending a higher budget than originally anticipated.
Dwindling cash flow and budget mismanagement
Cash flow problems can root from poor budget management, reducing the cash-rich nature of the business as liabilities begin to build. Poor cash flow refers to a greater outflow of cash than an inflow of cash, leading to dwindling funds. As the start-up edges closer to cash outage, this limits the amount of raw material and equipment which can be purchased for the business.
Sage, the multinational accounting software company, conducted a survey at a Dubai roadshow with start-ups and small to medium businesses in relation to which aspect they most struggled with when running a business. The survey found that 37 percent voted cash flow management as the most difficult component, in line with accounting affairs. This clearly indicates that maintaining steady cash flow is a challenge for new businesses and poses a high risk.
Geopolitical issues & worldwide differences
Across the Middle Eastern landscape, there are differential regulations, protections and legislation in place which can either create an opportunity for budding start-ups or restrict the way new businesses can operate. Geopolitical differences, such as gender rights, censorship, and freedom of speech can also pose challenges for start-ups, requiring you to adapt your approach when trading with selected countries.