In an exclusive interaction with Adlin Pertishya Jebaraj, Correspondent at Finance Outlook India, Nitin Lahoti, Founder & Director, Mobisoft Infotech, highlights that product engineering start-ups must plan financially for AI development work flows, enterprise security, and rising cloud infrastructure costs by aligning their budget to their product road map and growth forecast.

Having more than 19 years of experience in helping companies develop and implement digital strategies for their businesses. He is responsible for leading the sales team, client strategy, brand positioning and development at Mobisoft. His experience with UX design, product engineering and go to market strategies has resulted in many successful platforms across various industries, including healthcare, logistics, smart mobility and retail.

What are the emerging market trends in product engineering that startups should be financially prepared for? How can they proactively plan for these shifts?

Product engineering is growing more resource-heavy and startups should think proactively rather than responding too late. Early application of AI to development workflows is one of the apparent trends. This has ceased being experimental. It influences staffing strategies, equipment expenditure and facility decisions long earlier than is predicted by founders.

The other fact is that the customers are now demanding enterprise level security even in young enterprises. Security, data protection and secure architecture need to be planned to be invested in. These are not costs that you can delay till after expansion.

Another driver of costs that is silent is cloud usage. With products on the upswing, infrastructural bills can shoot up in a short period without anyone to check on patterns of use and optimization measures.

Startups need to develop financial plans with various growth scenarios in mind so as to keep readiness. Link hiring, infrastructure and tooling decisions to actual user projections of growth. I further advise founders to reserve a technology evolution budget. Markets evolve, tools get better and platforms evolve. When that flexibility is planned it prevents spending on emergencies in the future. Startups make assured, rather than hasty decisions when financial planning remains tied to the product roadmap.

Also Read: Purpose-Led Growth from a Financial Leadership Perspective

What role does financial planning play in the product development lifecycle for engineering startups?

Financial planning has an operational role along the product path. At the initial phase, it assists founders to establish the extent of experimentation they can manage prior to their requirement of quantifiable traction. The transparency of this ensures overbuilding is avoided in advance.

Budgeting aids the concentration of the teams when the product passes through the design stages and development phases. It provokes discussions regarding what features really do matter during the first release and what ideas can be postponed. This makes the product lean and enhances time to market.

Financial planning affects the rate of hiring, choice of a vendor, and investments in technology as development advances. Teams without clear budgets have the tendency of growing bigger than the revenue is able to sustain. Financial discipline is even more significant after launch. The cost of customer support, infrastructure and marketing starts to increase simultaneously. Planning links to increase costs and anticipated revenue targets.

Personally I have been able to get the best results by not using finance as a constraint but as a decision framework. It assists the founders to pose the right question at each level: Is this the right investment at this time where the product is?

How do you balance long-term strategic financial planning with the short-term cash flow requirements of a product engineering startup?

A balancing between long term thinking and instant cash requirements is one of the most difficult aspects of operating a product engineering startup. You are constantly saving to the future, but you live month by month. I prefer to have the full visibility into the runway. The founders are supposed to be aware of the number of months they have been operating on the existing expenditure. Any significant decision is defined by that number.

Short term flexibility is important. Attempt to keep the fixed costs low and do not make promises that will bind you when the revenues are not predictable. This will allow you space to make some changes in case of change of timelines. Meanwhile, not all investments are to be delayed. The product is safeguarded by solid architecture, security foundation, and core engineering quality. These can be costly to miss in the short-run, although they can frequently be pricey to repair in the long-run.

I tend to suggest that essential operating costs be separated out and strategic investments be separated out. Evaluate on a regular basis and re-evaluate depending on the progress of revenue and funding predictions. By doing so, this enables founders to remain in the present and create something that withstands.

Also Read: The Emerging CFO-COO Hybrid Role

What key financial metrics should product engineering startups track to ensure they are on the path to profitability and sustainability?

Financial metrics provide the founders with reality check other than product exaltation. Increase in revenue is significant; however, it can only have significance in association with good margins. Gross margin reveals the ability of the business to scale. Another very important number is the customer acquisition cost. You must know the amount you spend to attract a customer and the duration required to pay the customer back. This is compared to customer lifetime value to have a clear picture of sustainability.

Burn rate and runway are still basic. These figures will make you know how much time you need to have to attain the next milestone, be it profitability or funding. The recurring ratio of revenues is also what I listen to. The predictable income makes the business stable and makes it easier to plan. Lastly, the percentage measurement of engineering investment in terms of revenue can be tracked to monitor that innovation does not flood the budget.

It is a review of these metrics that keep the leadership on track. They make financial management a continuous practice and not a reaction at the end of the day.

In your view, what should be the key financial priorities for product engineering startups aiming for global expansion in the next 5-10 years?

The international growth is a strategic move, yet it requires proper financial planning. Expansion to new areas is associated with legal, tax, and compliance expenses that are usually much higher than anticipated. Missteps that are costly to make can be avoided by planning about seeking professional advice at an early stage.

Recruitment is also complicated. There is a wide variation in salary standards, benefits, and employment laws. The startup must have location-specific financial models rather than using home market assumptions everywhere.

The time of collection of revenue can also vary. The sales cycles in the new markets can be longer and this has an impact on cash flow planning. A financial buffer can make teams be patient as they develop local credibility.

There is an added complexity of currency fluctuations. Margins can be affected with the exchange rate movements as the international revenue increases. Even founders must have some idea of what they are exposed to and the fundamentals of mitigation.

I can recommend always to expand slowly. Test the model in one area and then invest heavily in another one. Expand ties based on definite performance benchmarks. Through strategic planning, international expansion will be a planned process rather than a fiscal adventure.