In October 2009, when 27-year-old Rupesh Shah, a computer science graduate and an Indian Institute of Management-Calcutta alumnus, turned down a job offer in Silicon Valley and, instead, decided to start his own venture, his parents were worried. The venture, InOpen Technologies, focuses on providing solutions on education material.
"We started with just Rs 2 lakh and put in additional capital of Rs 20 lakh by borrowing from friends and family. We were fortunate to receive credit from a nationalised bank," says Shah.
Usually, a start-up approaches a venture capital fund only when it is sure about the business' proof of concept. Ambareesh Murthy of Pepperfry.com says, "A big chunk of capital is utilised in hiring people, buying/leasing out office space and investments to be made in technology."
Identifying costs
"To name a few, one has to spend on compliance/regulatory work, accounting practices and legal fees. Besides these, the cost of products, the technology and sales are the most important and compulsory costs in a business. However, to what extent the owner wants to invest in each of these completely depends on him/her," says Amit Kohli, founder of FoodPanda.com.
Compliance: Compliance costs involve the tax deduction at source, provident fund for employees, registering foundation agreements, etc. First, the company has to be incorporated with the Registrar of Companies (RoC). The cost would depend on the company's share capital, as stamp duty has to be paid to the RoC on the basis of the share capital. For instance, if the authorised capital is Rs 15 lakh, with paid-up capital of Rs 5 lakh, the initial set-up fees would be Rs 40,000.
The second step would be obtaining a permanent account number (PAN) from the income tax department, without which the company wouldn't get approvals from other regulatory authorities.
One has to spend Rs 15,000 to register the company under the Shops & Establishments Act.
Profession tax of Rs 5,000 has to be paid for one-time registration, and this can be renewed every year. One-time registration for Employees' Provident Fund costs Rs 15,000, with a monthly cost of about Rs 3,000. Another one-time registration for Employees' State Insurance Corporation and value-added tax/central sales tax numbers would be Rs 5,000 and Rs 25,000, respectively. One has to pay an additional Rs 25,000 for the service tax number.
These costs vary, depending on the type of company and the area of business. "Overall, if you want to set up a company in a clean manner, you would require Rs 1-2 lakh in the first year on compliances," says Murthy.
Accounting practices: As a business, it's important to generate valid bills and vouchers for your retailers, suppliers and vendors. There are two ways to go about this. First, through software and second, through companies that render similar services. These softwares are also used to generate payrolls for employees; Tally keeps a tab on business generated by smaller start-ups.
Chartered accounting & legal fees: Typically, one should hire a chartered accountant and a law firm separately. These are important to manage documentation and the draft founder's agreement, apply for a trademark, file company returns, pay other taxes, etc. The costs would stand at Rs 10,000-50,000 a month, depending whether the lawyer works full-time or part-time.
Technology: The next big investment to be made is in technology. However, this is business-specific- if the business is internet- or e-commerce-based, spending on technology would be more, as the entire business is conducted on the internet. However, if the business is offline and product-specific, the investment could be on machinery. Experts say since a lot of money is already in building a venture, most businesses find it difficult to fund marketing activities.
Invest idle cash
If your money is in a current account, lock it in a short-term income fund. This is the best way to lock your idle cash or the cash you might not need for your business soon. Since income funds don't have entry or exit loads, one could exit the scheme in a few days, depending on how soon you need the invested money. On an average, such schemes generate returns in the range of five and eight per cent. One could also use other short-term debt instruments such as liquid funds to put idle cash to use. Ensure your cash isn't idle. Financial planner Gaurav Mashruwala says typically, if a business has too much idle cash, it should reinvest the sum in the business, if the business is on a growth path. "If the business is in a loss, it should invest in short-term fixed deposits, which give assured returns of five to six per cent. This would, at the least, help set-off the loss," he says.
How to save business costs
Sometimes, when a start-up secures funding, there's a temptation to spend it on things that might not necessarily be a priority for the business. Initially, avoid hiring people at high salaries. Also, do not recruit too many people.
An innovative way to cut costs is to give every employee equity in the company. Murthy, for instance, has carved out a part of his company stake. From this, every employee gets stake in the company. This ensures employees are interested in the company. Also, they are more accountable and responsible.
"Till your company gathers pace, keep the costs as variable as possible. Increase the fixed cost base gradually and only in areas that are core to the business model," says Kohli of FoodPanda.com.
Use the shared services model in non-core areas such as legal, compliance, etc. In these segments, employ on a part-time basis.
Question every 'necessary cost' item and evaluate whether it is really needed. Vishal Gupta of Mycity4kids.com says, "We have sales teams in six cities but have just one office each in Gurgaon and Bangalore. These 'savings' can be re-deployed in areas that generate a better RoI (return-on-investment)."
For the services provided, collect fees in advance wherever possible. Mycity4kids.com offers prepaid services to small and medium enterprises; so far, it hasn't faced major payment issues.
Roping in investors
Raising funds is a very complex and draining process. Once there is a framework, it has be presented in a document popularly called a business model. Ensure you have detailed financial models for at least two years. To attract funding, one has to pitch before angel investors, banks, venture capital (VC) funds, private equity funds, etc. If the investors see value in your proposition, you would get a term sheet. If the VC fund agrees and believes in your business concept, it would provide a shareholder agreement. The process of negotiations is long and both parties have to find common ground. After an agreement is reached, conditions would be set (amendment in the memorandum of association, the articles of association, transfer of shares, etc) before the money is transferred. Typically, the process takes three to nine months.
Maintain personal savings, goals
When initialising a start-up, it's best not to take any more financial commitments. Avoid buying a house or any other big-ticket item during this period. Have a contingency fund. "We keep a contingency fund of Rs 50-60 lakh at any given time. This should typically cover emergency expenses and supplier/vendor advances, if any. This should also take care of a sudden expenditure you might incur for at least two weeks," says Pepperfry.com's Murthy.
"We started with just Rs 2 lakh and put in additional capital of Rs 20 lakh by borrowing from friends and family. We were fortunate to receive credit from a nationalised bank," says Shah.
Usually, a start-up approaches a venture capital fund only when it is sure about the business' proof of concept. Ambareesh Murthy of Pepperfry.com says, "A big chunk of capital is utilised in hiring people, buying/leasing out office space and investments to be made in technology."
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Experts say initialising a start-up in India has a lot of operational hurdles. Also, various costs are involved. In the initial stages, there are three types of company formations - proprietorship, partnership and private limited. "While it's easy to set up a private limited company, it is one of the most complex ones, as these have lots of compliances to fill," says Shah of InOpen Technologies
Identifying costs
"To name a few, one has to spend on compliance/regulatory work, accounting practices and legal fees. Besides these, the cost of products, the technology and sales are the most important and compulsory costs in a business. However, to what extent the owner wants to invest in each of these completely depends on him/her," says Amit Kohli, founder of FoodPanda.com.
Compliance: Compliance costs involve the tax deduction at source, provident fund for employees, registering foundation agreements, etc. First, the company has to be incorporated with the Registrar of Companies (RoC). The cost would depend on the company's share capital, as stamp duty has to be paid to the RoC on the basis of the share capital. For instance, if the authorised capital is Rs 15 lakh, with paid-up capital of Rs 5 lakh, the initial set-up fees would be Rs 40,000.
The second step would be obtaining a permanent account number (PAN) from the income tax department, without which the company wouldn't get approvals from other regulatory authorities.
One has to spend Rs 15,000 to register the company under the Shops & Establishments Act.
Profession tax of Rs 5,000 has to be paid for one-time registration, and this can be renewed every year. One-time registration for Employees' Provident Fund costs Rs 15,000, with a monthly cost of about Rs 3,000. Another one-time registration for Employees' State Insurance Corporation and value-added tax/central sales tax numbers would be Rs 5,000 and Rs 25,000, respectively. One has to pay an additional Rs 25,000 for the service tax number.
These costs vary, depending on the type of company and the area of business. "Overall, if you want to set up a company in a clean manner, you would require Rs 1-2 lakh in the first year on compliances," says Murthy.
Accounting practices: As a business, it's important to generate valid bills and vouchers for your retailers, suppliers and vendors. There are two ways to go about this. First, through software and second, through companies that render similar services. These softwares are also used to generate payrolls for employees; Tally keeps a tab on business generated by smaller start-ups.
Chartered accounting & legal fees: Typically, one should hire a chartered accountant and a law firm separately. These are important to manage documentation and the draft founder's agreement, apply for a trademark, file company returns, pay other taxes, etc. The costs would stand at Rs 10,000-50,000 a month, depending whether the lawyer works full-time or part-time.
Technology: The next big investment to be made is in technology. However, this is business-specific- if the business is internet- or e-commerce-based, spending on technology would be more, as the entire business is conducted on the internet. However, if the business is offline and product-specific, the investment could be on machinery. Experts say since a lot of money is already in building a venture, most businesses find it difficult to fund marketing activities.
Invest idle cash
If your money is in a current account, lock it in a short-term income fund. This is the best way to lock your idle cash or the cash you might not need for your business soon. Since income funds don't have entry or exit loads, one could exit the scheme in a few days, depending on how soon you need the invested money. On an average, such schemes generate returns in the range of five and eight per cent. One could also use other short-term debt instruments such as liquid funds to put idle cash to use. Ensure your cash isn't idle. Financial planner Gaurav Mashruwala says typically, if a business has too much idle cash, it should reinvest the sum in the business, if the business is on a growth path. "If the business is in a loss, it should invest in short-term fixed deposits, which give assured returns of five to six per cent. This would, at the least, help set-off the loss," he says.
How to save business costs
Sometimes, when a start-up secures funding, there's a temptation to spend it on things that might not necessarily be a priority for the business. Initially, avoid hiring people at high salaries. Also, do not recruit too many people.
An innovative way to cut costs is to give every employee equity in the company. Murthy, for instance, has carved out a part of his company stake. From this, every employee gets stake in the company. This ensures employees are interested in the company. Also, they are more accountable and responsible.
"Till your company gathers pace, keep the costs as variable as possible. Increase the fixed cost base gradually and only in areas that are core to the business model," says Kohli of FoodPanda.com.
Use the shared services model in non-core areas such as legal, compliance, etc. In these segments, employ on a part-time basis.
Question every 'necessary cost' item and evaluate whether it is really needed. Vishal Gupta of Mycity4kids.com says, "We have sales teams in six cities but have just one office each in Gurgaon and Bangalore. These 'savings' can be re-deployed in areas that generate a better RoI (return-on-investment)."
For the services provided, collect fees in advance wherever possible. Mycity4kids.com offers prepaid services to small and medium enterprises; so far, it hasn't faced major payment issues.
Roping in investors
Raising funds is a very complex and draining process. Once there is a framework, it has be presented in a document popularly called a business model. Ensure you have detailed financial models for at least two years. To attract funding, one has to pitch before angel investors, banks, venture capital (VC) funds, private equity funds, etc. If the investors see value in your proposition, you would get a term sheet. If the VC fund agrees and believes in your business concept, it would provide a shareholder agreement. The process of negotiations is long and both parties have to find common ground. After an agreement is reached, conditions would be set (amendment in the memorandum of association, the articles of association, transfer of shares, etc) before the money is transferred. Typically, the process takes three to nine months.
Maintain personal savings, goals
When initialising a start-up, it's best not to take any more financial commitments. Avoid buying a house or any other big-ticket item during this period. Have a contingency fund. "We keep a contingency fund of Rs 50-60 lakh at any given time. This should typically cover emergency expenses and supplier/vendor advances, if any. This should also take care of a sudden expenditure you might incur for at least two weeks," says Pepperfry.com's Murthy.