Complex Made Simple

Financial risks for start-ups and how to avoid them

There are a couple of risks that all startups should be aware of, and yet, all of them can be overcome with the right knowledge ... here's more ...

Undertrading can lead to missed opportunities, while overtrading will see your startup plunge in time How well does the startup handle its cash flow? Is there budget mismanagement? 37% find cash flow management is the most difficult component, in line with accounting affairs: survey

By Keith Tully, Director at RBR Advisory

 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.

For example, the ban on female drivers in Saudi Arabia was lifted in June 2018 by Saudi Arabian crown prince, Mohammed bin Salman. This catalyst for change allowed Careem, the car-hailing company, similar to Uber, to hire their first female driver. This advocates female rights and creates a talking point for the media and positively contributes to the reputation of the business. All of which can influence the way customers interact and invest in your brand.

Although positive societal changes can create opportunities for start-ups seeking to establish the business in a competitive market, this can create a reputational and financial risk if important measures are ignored or disregarded.

Following the lift of the ban, CNBC posted an article critical of Uber which carried the following headline, ‘Why Uber only has only ‘a handful’ of woman drivers in Saudi Arabia, while local rival Careem claims more than 2,000.’ This not only increases local competition but can cause financial repercussions. However, the news story gave Uber the perfect opportunity to unveil their plans for female drivers by allowing them to request female only passengers.

The Jamalon Story 

Understanding the financial bracket of your client base can help determine the manner in which to target your services, establish your marketing strategy and trade with selected countries or regions. Online book retailer, Jamalon, was founded by Ala Alsallal after he spotted a gap in the Middle Eastern market for Arabic books. The business now delivers over 12 million publications in Arabic and English across 22 MENA (Middle East & North Africa) countries.

The business reached financial success in the KSA (Kingdom of Saudi Arabia) after recognizing the large literary customer base and concentrated wealth rooting from selected families.

Jamalon was also able to overcome challenges faced when shipping banned books across the Middle East by dedicating a section solely for ‘banned books’. Alsallal has previously addressed this initiative as a financial success, “Any book sold in the Middle East normally becomes boosted when a government bans it – it becomes a best-seller.”

Jamalon successfully launched in 2010, having received funding from Fadi Ghandour, Executive Chairman of Wamda Group, a Venture Capital Fund and founder of Aramex. It is vital for start-ups to build a bank of working capital before spearheading the business into overseas markets, which contributed towards the success of Jamalon.

As mentioned earlier, a lack of cash flow early in the process for start-ups can leave the company wallet dry and empty. By acquiring start-up finance through the help of angel investors, crowdfunding or alternative finance, it can help pave the road to success.

 Keith Tully, Director at RBR Advisory


Keith Tully has more than 25 years of professional experience in business restructuring, turnaround, UK insolvency law, and commercial finance.