Importance of Cash and Hiring in a new business

Cash is like oxygen to a start-up, probably much more important than earning profits. The question of optimum burn rate is something which is critical for all kind of start-ups. The trade-off is between growth opportunity and the risk of failure. For a established firm it is easy to procure capital but this is not the case with the start-up. The optimum burn rate is decided on the basis of factors such as

• Cash to sustain operations e.g. salaries of the employees, office rent etc.
• Enough cash to acquire a new customer and generate positive NPV
• Growth is more important because you would like to fail fast than not to expand
• Amortize the idea over a larger volume of business

Hence on one hand the opportunity to expand is very lucrative but the risk of failure is also high. The ideal strategy would be to reduce the burn rate to an extent the survival is not risked and the growth opportunity is also not sacrificed which is more likely if they stick to their current model of operation and give some more time to reap profits.

Hiring is also one of the most difficult and important decisions for a start-up. It is difficult to find the right fit with the right skills and motivation to succeed in a start-up environment. It is difficult to assimilate a new employee within the already established inter-relationships in the organization. It is important that the new joinee complement the existing skill sets, share the vision of the company and stay committed for a longer period of time. The problems of the moral hazard and long-term commitment should be solved by giving stake and options to the first employees before the firm gets bigger.

Do read my note on the differences between an established company and a start-up when it comes to an innovative business idea..
http://buildyourbusinesshere.blogspot.in/2015/03/entrepreneurship-vs-established.html

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