A business’s financial objective is NOT to make a PROFIT... This is not just in the context of startups, but also for family businesses / MSMEs...

The financial objective of a business is to manage POSITIVE CASH FLOWS.

It’s best to get positive cash flows from operating activities: i.e. selling products, services, subscriptions, etc.

But till the time the operating activities don’t turn positive cash flows, the purpose is managed in the interim through financing activities of raising debt or equity from external investors.

This slight change in the perspective of the financial objective of a business from profit to cash flows helps people appreciate the fact that a business can be loss-making in the first few years if it is continuing to generate positive cash flows.

Real discipline lies in knowing that the time till when one can use financing activities to manage positive cash flows instead of operating cash flows should be limited - and not overstretched.

As an example, it may be reasonable for a startup to raise external capital and use it for:
- building a good product or bear a high capital expenditure for set up
- improve the product and spend on making it habit forming

But how much time would you allow a business to do this through external funds till it turns profitable?

I believe in most cases, it should not stretch beyond 5-7 years.

Stretch it beyond 7 years of you not being able to generate positive “cash flows from operations”, and sustainability can get difficult.

Soon, the focus will change from creating value for consumers to being forced to create value for investors at the cost of consumers / incoming retail investors.

👉🏼 Now, let’s look at it in the context of MSMEs.

MSMEs make money, but don’t show high profits to optimize on tax costs.

There are enough ways to plan taxes legitimately, and legally, if one knows how to manage cash flows.

One can borrow capital, invest in fixed assets, charge depreciation and interest to cash flows and do a hundred other things to save tax.

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A Chartered Accountant with about 10 years of experience in areas of Tax Advisory, Startup Consulting, Fundraising, Audits, Deal Advisory, Business Modelling and contract CFO services.

Winner of the ISB Young Leader Award 2017 and the Best All Rounder, PGP Class of '17, Sarthak has also been published about in the leading financial newspapers such as The Financial Express as possibly the youngest Indian to have completed the courses of CA, CS and CMA along with a graduate degree in Financial & Investment Analysis from University of Delhi, all by the age of 23 year