Journey of a Serial Entrepreneur

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How to get from where you are to where you want to be

5 Tips for Better Cash Flows

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” Warren Buffet

Mismanagement of cash flows is a leading cause of failure among businesses. Business owners do not realize how critical it is to budget and plan cash flows from the beginning of the venture and most times a liquidity crisis catches them completely off guard. This often leads to irrational last minute maneuvering which amplifies the problems at hand. To ensure smooth cash flow cycles we have to ensure that we are extremely vigilant of the financial health of our business from the onset. This may appear to be over simplistic advice, however the truth of the matter is, not enough emphasis is given to this function. The excitement lies in closing those million dollar deals and creating fancy marketing campaigns. Reality of the matter is that if we do not have the financial structure in place to support these deals and campaigns we will soon find ourselves in a lot of trouble. Listed below are a couple of tips which have helped me manage cash flows better.

1. Inflows & Outflows: From the onset identify your inflows and outflows. If you have adequate historic data, map out how long on average it takes to receive cash after providing your product/service. Next carefully map out all your expenses, and dates when they need to be paid. Next we have to minimize the time between the two flows. Usually inflows are much slower than expected and this needs to be compensated by negotiating favorable agreements with suppliers, stocking less and invoicing your customers at regular intervals. To learn more about the importance of mapping out inflows and outflows please click here.

2. Cost Management: Cost cuts do not necessarily require a business to layoff staff or drastically cut marketing expenditure. I take the approach of measuring cost effectiveness in terms of every product or service that the business is providing. The goal must be to provide the product or service at a lower cost than the competition. Identify all direct costs, incremental costs of increasing volume, fixed costs and overall cost structures in comparision to the competition. This does not necessarily have to be reflected in lower price points. As we widen the cost comparison between competitors, we are able to hold a much stronger position in the overall industry. To learn about each cost in greater detail please click here.

3. Marketing: Cutting marketing expenses to conserve cash is often not the most optimal solution for solving one’s cash flow problems. Assessing marketing strategies and tactics needs to be practiced on a regular basis. It is not wise to make marketing expenses cyclical with business cycles. With optimized marketing campaigns and strategies in place, a business has greater chances of avoiding these cash gluts as business is constantly being generated at a healthy level. To learn more about marketing strategies during a liquidity crunch please click here.

4. Technology: Gone are the days of keeping track of your business expenses on excel sheets. As a business owner today we should use one of the many accounting packages available to make sure we always have a financial snapshot of the health of our business. This will provide us with the ability to quickly identify trends and potential liquidity crunches before they take place. Please click here to read five questions you need to answer before selecting which accounting package is right for you.

5. Last Resort Measures: There will be times however when a liquidity crisis will hit . It is important that when it does we remain calm and evaluate the options we have instead of making rash decisions. The options I have used during these period of times are, discounting, credit cards, loans from friends and family, invoice factoring and secured credit lines. All of these options need to be used when all other alternatives have been exhausted. Attention needs to given to ensure that all documentation has been read carefully and that one is fully aware of the pro’s and con’s of each measure. To learn more about each measure please click here.

Those who have experienced liquidity crunches realize how stressful and frustrating these cycles are. They can result in partners leaving the business, unpleasantness at the office and even eventual closure of the business. Using some of the tips provided above we can avert a number of these situations. It comes down to better financial planning and catering for unforseen events. We have to be prepared when such situations arise and must deal with them face on. There is no need to dig ourselves deeper into a hole by using temporary fixes. If the business that you are running is repeatedly running into cash flow problems, do your best to re-engineer it from the ground up, or have the discipline to change boats.

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Getting out of a Cash Crunch

“When you’re in a pit, the first thing to do is to stop digging.” James Ellman

At some point of time or other most entrepreneurs go through a cash crunch period. These are stressful and frustrating times when the world seems to be falling apart around us and we have a limited set of options to get out of the mess. I have found that by following the tips provided earlier in this series we can reduce the probability of being stuck in a liquidity crisis substantially. However, there are times when even after having planned for every conceivable outcome there is a blind spot we missed out. The important thing to do at this point is not to panic. Cutting your marketing budget, laying off staff and hawking office equipment on ebay is not usually the answer. In a situation where we have exhausted options of negotiating extensions with suppliers and run out of excuses why we have not settled the rent, there are a couple of alternatives I have used. Listed below in order of my personal preference are:

1. Discounting: If we are in a quarter with a number of payments due I include a clause in outgoing invoices stating that if payment is made within x number of days there will be an x% discount. This creates monetary incentive for clients to pay up on time. If invoices have been pending for a while I give the same discount to the client stating they should pay the discounted bill or we would be forced into calling in collection agencies. Surprisingly I have had very good results using this method in speeding up payments causing strapped up cash.

2. Credit Cards: I personally do not advocate using this type of financing but when the situation calls for it, use it as an emergency backup. These can be either business applied credit cards or personal cards. Using the cash advance option, essential payments can be made. This will help tide through the business until payments are made by clients. Using this option for any other expenses other than these critical ones results in getting buried by ridiculously high interest payments. Instead of fueling growth for your business this stunts growth. Use it with caution

3. Loans from Friends & Family: If you are in desperate need of some bridging capital and need access to it quickly, going to friends and family is a valid option. I do not like mixing friends and family with business, but at times it is unavoidable. Make sure when you take the money there is an agreement with terms and conditions spelt out in black and white. Full disclosure must be made regarding the situation at hand as well as when you are expected to repay the loan. Conflicts tend to arise when inadequate information is given, this results in confusion and unrealistic expectations.

4. Invoice Factoring: For businesses with natural and steady flows of revenue, but prone to erratic payments, applying for these schemes through banks or specialist factoring companies is an option. These basically take into account your average business activity and streams of revenue, then provide you a credit line against it. This can free up much of your working capital and can boost growth. However read the fine print carefully. Sometimes these institutions limit who you can do business with, and can also force your clients to interact with them as far as payments are concerned. This reflects negatively on the business and does not convey a good image to your customers.

5. Secured Credit Lines: If one is expecting the next couple of quarters or year to be tight, taking out a secure credit line may be a good alternative to solve the liquidity crunch. The bank provides you with a line of credit which is usually secured against a particular asset. The asset is usually real estate which you or the business may own. The business is then able to borrow money against the asset conveniently. This is an option exercised by many entrepreneurs. However it takes time to setup, therefore one must plan for it well in advance and not when you are stuck in a liquidity crisis.

No one wants to be stuck in a liquidity crisis. We must do all we can to ensure the business does not slip into one. Keep your eyes on both the sale numbers and controlling expenses. When and if the situation becomes critical these last resort measures can provide significant relief in assisting you to get out of the mess. It is important to use these options wisely and to do thorough research on them before committing to any one of them.

Related Articles:

Raising Capital from Family & Friends

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Technology and Cash Flow Management

“What amount of value creation can be assigned to the efforts of management for a particular time period? That is the essence of accounting. Otherwise, it’s simply an appraisal process.” Charles W Mulford

Gone are the days of keeping track of your business expenses on excel sheets. Earlier on in my entrepreneurial journey we relied solely on excel sheets to manage accounts. However we were then introduced to Quickbooks, and it completely changed the way we viewed our accounts. With this software we were actually able to extrapolate a lot of data and zoom into key metrics by which we could monitor the growth of our business. Many business owners wait until they have an ‘established’ business before investing in standard accounting software. This is like wearing a helmet after you have experienced a fall. Undoubtedly experience is a great teacher and one should continue to learn from mistakes. There are however some precautions which should be taken beforehand, and getting software to manage your accounts is one of them.

There are many great accounting solutions available in the market today. These key questions need to be answered when selecting an accounting package:

1. What is your budget allocation for purchasing this software? (If a budget has not been allocated there are many free accounting solutions which one can find online)

2. Do you want the software to run locally on your computer or would you want web access to your data?

3. How many users will be using the software?

4. What is the primary purpose of purchasing the software? (Do you require a simple application which helps to track all of your incomes and expenses, or do you require one through which you can manage inventory, payroll, invoices etc)

5. What level of reporting will be required? (If one requires simple profit/loss, cash flow and balance sheet statements there are a lot of great packages out there. For more complex reporting, software like Quickbooks premier can generate detailed reports on sales report per employee and profitability per product)

Once these key questions have been answered, you will have a better idea for the sort of solution required and your search would have been made easier. When you have selected a software, assign someone or a group of people to continually update it to ensure access to the latest activity. This acts as a safeguard and protects over exposing the business to unnecessary risk as well as maximizing the opportunities currently in hand. I plan on creating a widget which will compile the answers to the questions above, and help provide a list of appropriate software or services. If anyone would like to help me out in creating it please let me know at blog (at) usmansheikh.net

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Cutting your Marketing Budget?

“Marketing is not an event, but a process . . . It has a beginning, a middle, but never an end, for it is a process. You improve it, perfect it, change it, even pause it. But you never stop it completely.” Jay Conrad Levinson

The quote above encapsulates the essence of this blog post. I don’t think anyone could have said it better. I am a fan of all Mr. Levinson’s work especially his book “Guerrilla Marketing”. In the book there is constant emphasis on marketing being a process which we cannot cut whenever things get tight. As I mentioned in my last post, costs need to be contained tightly if we are to reach our goal of attaining a positive cash flow. What I have noticed is that whenever things get tight, cash flow wise, many entrepreneurs tend to pull the plug on marketing expenses in an effort to control costs. This however leads to a decrease in new business development, which ultimately results in decreased revenues.

Cutting marketing expenses to conserve cash is often not the most optimal solution to solving one’s cash flow problems. Assessing marketing strategies and tactics needs to be practiced on a regular basis. For example we could be advertising our new virtual assistant services on the front page of a popular web portal. We have continued to run the ad for the last quarter but have barely broken even on our investment.  We find however that ads running with much greater ROI on a couple of niche blogs and portals relating to the GTD methodology. As a business owner we should assess these trends on a regular basis and change out strategies likewise. If we take the approach of cutting all web advertising, it is more like amputation instead of laser point surgery.

These budgets and control measures need to be adopted from the onset of your business venture. It is not wise to make marketing expenses cyclical with business cycles. With optimized marketing campaigns and strategies in place, a business has greater chances of avoiding these cash gluts as business is constantly being generated at a healthy level. If you are currently experiencing cash flow difficulties in your business, assess your marketing budget and find ways to optimize the cash available to you in order to maximize your ROI.

Related Posts:

Marketing Budgets & Controls

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How lean is your startup?

“Excess cost can be created by indirect factors that aren’t immediately apparent. You can attack these costs only by getting to the real heart of the problem, rather than just bashing away at the cost itself. The three biggest indirect cost generators are time, complexity, and poor quality.” Andrew Wileman

These days there is a lot of talk about shaving costs and becoming more capital efficient. With the credit markets the way they are, just about every venture capitalist has sent out doomsday emails telling their portfolio companies to brace themselves for tough times. I understand that market conditions are very bad, however what I fail to understand is why such emails are not sent out on a regular basis to portfolio companies. As companies become more adept at providing products and services there should be a natural downward trend in their costs. If such a trend is not becoming apparent the business needs to re-evaluate it’s position and figure out where it is leaking cash. From a cash flow perspective this is an extremely vital exercise. If costs are allowed to inflate without sufficient increase in revenue and benefits of economies of scale, the business is headed straight for trouble.

I take the approach of measuring cost effectiveness in terms of every product or service that the business is providing. The goal must be to provide the product or service at a lower cost than the competition. This does not necessarily have to be reflected in lower price points. As we widen the cost comparison between competitors, we are able to hold a much stronger position in the overall industry. Some questions that you can ask yourself to determine how lean your startup is, are:

1. What are the direct costs associated with providing the product or service? If you are selling used mobile phones through the internet for instance, then some of these costs would include; procurement expenses, hosting of a website, marketing campaigns for the website, and delivery costs to customers.

2. What is the incremental cost of producing one more unit or providing another service? Over time economies of scale should kick in and we should see a fall in the incremental cost. In today’s world, thanks to the internet the cost of delivering the same service to many customers has very little incremental cost. For instance if you set up a web service to provide an ability to create invoices, the architecture can be used to serve 1 or a 1000 customers. What needs to be identified is, when does one need to add more servers or optimize the architecture to handle more users.

3. What costs remain unchanged irrespective of volume of products and services provided? These are your fixed costs. One needs to find a level of products and services to ensure we break even. These costs must be contained in order to reach positive cash flows and profitability faster. Services such as Amazon’s s3 cloud computing services provide new web startups the ability to scale much faster and keep fixed operating costs at a minimum. Finds ways how you can reduce your fixed operating costs.

4. How does your cost structure compare against your competitors? This is often difficult to assess but it is possible to get a rough idea after doing some research regarding the competition’s processes. Once we can assess areas of advantage and disadvantage we can build on these segments respectively.

Cost cuts do not necessarily require a business to layoff staff or drastically cut marketing expenditure. If costs are inflated to begin with, these cuts need to take place whether we are in a boom cycle or a recession cycle. The focus needs to be placed on ensuring we optimize reduction of overhead counts, at the same time not letting our growth stagnate. An equilibirum needs to be found, once we have thoroughly assessed the business we will be able to reach such a level.

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Inflows and Outflows

“Eventually everything shows up in earnings and cash flow, but it shows up late.” David Larcker

A fundamental premise of business is that when your inflow exceeds your outflow, the business will make a profit. In principle that is how things work, but there is a big difference between profit and cash flow. One could have a positive cash flow yet be running at a loss. As an entrepreneur we have to first make sure we become cash flow positive and then ensure that we make a profit doing so. Going for big multi-million dollar deals with huge margins is very exciting. However when we pursue such types of deals, we get stuck with the hidden costs associated with such deals fairly early on. They include major revisions, slower decision making, slower payment cycles and the possibility of losing the deal at the last minute. I have learned this lesson the hard way and have since become a true believer in singles and doubles (smaller deals) rather than going for the home run.

The cash flow section of the business plan is a critical component and is often given great importance and emphasis by investors when evaluating a business. This section basically involves outlining both the inflow and outflow from your business activities. Quite simply, these are revenue and interest earned on investment subtracted by the costs associated with running the business. If you have been having cash flow problems in your business and have not created a cash flow projection sheet, I recommend you do so immediately by identifying your inflows and outflows. However the real problem is that inflows are usually much slower to come in than your outflows. This is when the business begins to run out of cash and is put under a lot of pressure. There are a couple of tips which can help ease this problem:

1. Invoice at regular intervals and have a strict follow-up policy. Instead of billing the client for your services at one go, bill them in smaller increments regularly to ensure a steady stream of cash. Have built-in policies to ensure that customers who delay payments are downgraded for all future deals and are constantly reminded via all means about outstanding payments.

2. Extend supplier credit for as long as you possibly can. These are usually large payments that put an enormous strain on the business cash flow position. Negotiating extended supplier credit terms can be very tricky. If you have guaranteed orders which are going to be given to the supplier in the near future I seldom use those to gain more leverage during the negotiation process.

3. Stock less of your product if meeting supplier payments will be an issue. Converting idle inventory to cash usually takes quite a long time and panic offloading will result in large losses if they are unloaded below cost.

Managing inflows and outflows is a very challenging. However, missteps to manage them efficiently ultimately leads to the closure of the business. Therefore we need to continually forecast cash flow projections and ensure that we remain in a position to meet our obligations.

Related Posts:

Forecasting

– Communication Channels

Internal Policies

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Are you Out of Cash?

Happiness is a positive cash flow. Fred Adler.

I do not agree completely with Mr. Adler’s point of view but I do understand where he is coming from. Those of you who have been through tight cash flow cycles, will be able to connect with the quotation much as I did. Running out of cash is a fundamental reason why many businesses have to pack up and fold. Without correct management of this critical asset, we find ourselves unable to meet payroll needs, pay suppliers or even cover basic business expenses. We could have a booming business yet mismatched inflows and outflows can cripple the business’ ability to meet obligations.

First time entrepreneurs, and in general smaller companies are more vulnerable to experiencing such incidents. There are a few major reasons behind this.

1. Firstly, due to inexperience, first time business owners generally do not have a tight control over outflows. This results in over inflated payrolls, very high basic expenditures and often frivolous spending on equipment and services which they clearly do not have a requirement for. With high burn rates and not enough business coming in, the business usually has to drastically cut expenses and lay-off staff to make ends meet.

2. Secondly, marketing plans are usually not executed as planned and controls are not put into place to measure their effectiveness. This results in fewer deals being clinched and ultimately lower revenue figures. With less cash in hand, marketing efforts are usually scaled back and this becomes a vicious cycle where there is not enough business coming in to sustain basic expenses.

3. Thirdly, due to their smaller size, larger clients usually take advantage of them by delaying payments and suppliers do not provide adequate credit support. This results in a two way pull where matching inflows to outflows becomes an extremely challenging juggling act.

These are just some major problems which result in a cash flow crisis. Not only are these situations detrimental for the health of the business, they also lead to higher levels of stress for the business owner. The fact of the matter is that managing cash flow is challenging for any business regardless of its size. It requires discipline, creativity and a lot of perseverance. Over the course of this week I will share some insights on how to make cash management systems more effective. I would like to know what systems readers are currently using to manage their cash flows, and, what has worked and what has not.

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If only we had more resources!

“Money never starts an idea. It is always the idea that starts the money.” Owen Laughlin

Two common scenarios and attitudes take root when entrepreneurs hit a high in frustration. The first scenario is about individuals planning on taking the plunge into entrepreneurship. This group is worrying constantly about the need to have lots of money and resources in place to start the business. They start using this as a scapegoat for delaying the decision to get into business. Frustration levels build up as they continuously play the  “if only I had some money” refrain in their head. In such a situation however, frustration is often a natural by-product. What I recommend to this group is, stop complaining, cross this initial barrier and write down what they want to do and how much money they would need realistically. Sometimes the obvious becomes blurred with too many things clouding judgement. 

The second scenario concerns entrepreneurs in the initial phases of development. This is before raising sufficient capital, when they realize how much more they could do, if only they had more resources. The focus switches away from the current situation and the “what if’s”  take over. Once again frustration levels begin to hit high levels when they start feeling that their office space is too small, marketing budget too limited and that they are sacrificing their time, which has a high opportunity cost. I have experienced this situation many a time. I am sure many entrepreneurs feel this way as well. Being lucky enough to reach the flip side when resources are plentiful, helps you remember those early days fondly. Those days do teach you the value of time and money, in a way few other experiences can match. Use them to learn, and prove to yourself that you have what it takes to succeed.

In both scenarios frustration causes a change in focus, away from the end goal. Instead of using this opportunity as an opportunity and learning experience, we tend to blame our circumstances. In reality, there is a lot of money out there, searching for a good team, a good idea, in the right market. These three factors are pre-requisites that need to be in place before, you get access to those resources. Channel all that frustrated energy positively, to help you achieve those pre-requisites as early as possible, soon you will be well on your way. As a bonus, stories of surviving on maggi noodles and 4×4 shared office spaces or garages are always a lot more interesting to relive and share! 

Related Posts:

5 ways how to fund your startup

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Financial Risk

“Before you can really start setting financial goals, you need to determine where you stand financially.” David Bach

In most businesses I have been part of todate I have been lucky to have partners who excelled in the field of financial control. Over the years I have come to realize that without these controls a business loses its foundation and is on shaky grounds even when the company is making steady profit. Once you have a financial accounting system in place and have reliable data regarding the forecasts, budgets and the companiy,s cash flow, your teams gains a morale boost knowing that the business is supported by strong numbers and an understanding of the numbers that have to be hit to keep everyone afloat. Listed below are a couple of a pointers which formulate the basis of this foundational core to reduce the risk of your business going under, due to lack of financial control.

1. Using an accounting system: One of the first things you need to do if your business has a sizable inflow and outflow of finances is to buy an accounting system. For those without financial background this provides a professional framework to operate in and to record in detail the financial health of your business. I have used Quickbooks  and it has proved to be a relatively simple and robust accounting system.

2. Forecasting: This provides the business with goals and direction and an outlook for goals that need to be realistically achieved. Doing yearly and quarterly forecasts provides the team with numbers that need to be hit to ensure steady and profitable growth. Without them, you are aimlessly wandering from quarter to quarter and never really hit any targets. Most importantly your goals must be SMART, setting unrealistic expectations will only result in decreased morale.

3. Budgeting: If you have set forecasts and goals for the company, they must be adequately supported by funds to ensure they are met. This is difficult for early stage startups and one of the primary reasons so many venture backed companies burn through their initial funding. There need to be strict controls to ensure that you use your budget as a control measure thereby avoiding hemorrhaging cash through miscellaneous expenses which are fund consuming .

4. Cash flow: The inflow of funds in your business must exceed the outflow . Even though the concept of cash flow is simple to understand, it is a  primary reason why many small business fail. By not correctly managing the flow of funds you will be placed in awkward situations where you will not be able to meet expenses. Review your policies on customer credit and negotiate favorable terms with your suppliers. Keep checking that your expenses are being matched by your revenue and if possible, develop a cash cushion to weather you through the difficult times.

If you have not implemented these basic controls at your startup, I strongly suggest that you take steps to integrate them into your daily operations. This will help provide everyone in the team with a transparent picture of the health of the company. Initially it will take  time to set up all the controls and will take some getting used to. However it will be well worth the effort. Take control of your finances today because lack of financial control should not be the reason you go out of business!

 

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5 ways to fund your startup

“If you experience great difficulty in raising money, it’s not because VCs are idiots and cannot comprehend your curve-jumping, paradigm shifting, revolutionary product. It’s because you either have a piece of crap or you are not effectively communicating what you have. Both of these are your fault. End of discussion.” Guy Kawasaki

Over the last week we talked about 5 ways on how to fund your startup. This list was limited to traditional funding options. For a list of a 101 creative ways to raise money for your startup please click here. Keeping in mind that funding is an important aspect of any startup, your belief and faith in your idea or concept is far more important. Before you go searching for funding make sure that you have your value proposition clearly in mind. Position yourself correctly and leverage on a good team to propel you to the highest of heights.

  1. Friends and family: This source represents a large portion of how startups get off the ground. It is however not as straight forward as it looks and you have to take into account the lenders financial status, bring professionalism into presenting your idea and have a properly structured legal agreement. To read more about this source please click here.
  2. DIY: A tough route where you develop a consulting model to facilitate the development of your end goal.This method provides entrepreneurs with a safety net before taking the deep dive. Care needs to be taken to ensure that you work towards specific and realistic goals in mind to progress to the next level. To read more about this source please click here.
  3. Angel Investors: Represent a group of high net individuals who are well  connected. They bring with them specific expertise and a valuable network to kick start your business. They provide a more flexible environment to the founders as compared to venture capitalists. Care must be taken when taking on an angel investor. Your interests must be aligned and a comprehensive legal agreement outlining each others responsibilities is critical. To read more about this source please click here.
  4. Incubators: Provide entrepreneurs with initial seed capital and resources in exchange for a minimal equity swap to get your idea off the ground. They help you in creating powerful networks which act as catalysts to get your product/service moving in the right direction. Incubators are quite scarce making them extremely difficult to get into. To read more about this source please click here.
  5. Venture Capitalists: Represent the end goal of most entrepreneurs. Venture backing provides you with the funds, mentorship and networks to take your startup global. Care has to be taken when presenting to VC’s, you have to ensure that you get referred to the firm, have a comprehensive business plan, a working prototype and a well made presentation to stand a chance. To read more about this source please click here.

The life blood of any startup company is its available cash line. Without it, startups witness stunted growth where their full potential is not realized. Establishing a reliable and stable cash line therefore becomes very important if you want to see your company become the next Google. If you happen to be among the fortunate few who get venture funded please use your allocated funds wisely. The art of bootstrapping by Guy Kawasaki is something that every entrepreneur should read very carefully. I have personally seen how venture funded companies squander their money without realizing. Spending money is the easy bit, especially so at a startup when we all strive for the best. Controlling your spending is much more of an uphill battle, so tread carefully. Best of luck in raising funding for your startup!

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