While most startup founders possess basic entrepreneurial skills (creative thinking, networking, marketing, technical skills and the rest), a good number of founders likewise have little or no knowledge on basic startup finance and management. Founders who have no background in finance, more often than not, shy away from learning and understanding basic concepts in finance because they are focused on keeping the business running.
The irony is that a business can survive bad ideas, poor sales, low traction and even bad executives, but it won’t survive without money. Thus it is imperative for founders to not only possess marketing or managerial skills but also to be financially literate.
“Financial literacy involves making informed and financially responsible decisions using the knowledge and understanding of skills like financial management which includes bookkeeping, financial projections, financial statements and financing (debt & equity)”.
What is Financial Literacy?
Financial literacy is your ability to leverage your skills and knowledge of accounting and money management to make proper business decisions. In other words, it is your ability to effectively use money, either from debt or equity sources, to yield a profitable business which then becomes sustainable.
As a startup founder, you’re saddled with the responsibility of planning, creating a budget, payment of taxes, allocation of scarce resources and making other key financial decisions. Without a good grasp of basic financial concepts, you will be prone to make bad financial decisions which will have a negative impact on your startup.
Why is Financial Literacy Beneficial to Startup Founders?
Unlike big companies, startups don’t usually have the resources to engage the services of a finance analyst like a CFO or an accountant thus the responsibility to make good financial decisions lies solely on the founder(s). Alternatively, founders can hire contractors but there’s a huge risk involved when founders aren’t actively engage in making major financial decisions affecting their startup.
Outlined below are some of the benefits of being financially literate as a founder:
- Having a basic understanding of your startup’s finance helps you understand the overall financial health of your business and equips you better to reach your financial goals.
- Since the success of any business, to a great extent, depends on how its finances are managed, a good knowledge of financial concepts, strategies and management sets your startup up for profitability.
- Being financially literate arms you with knowledge and skills necessary to make financially responsible decisions in such areas as cash flow management, handling of taxes, budget creation, hiring of employees and analyzing financial statements.
- Proper financial planning which stems from being financially literate, prepares you to withstand challenging times/downturns in your startup, utilize new opportunities, thereby maximizing your startup’s possible success.
Fundamental Concepts of Financial Literacy
As a founder, being financially literate entails having knowledge of basic financial management skills and measures the degree to which one understands fundamental finance concepts which may include:
Bookkeeping: A critical part of daily financial management, where you record all income and expense transactions. Founders should get acquainted with basic day to day bookkeeping (which has been made more seamless with the rise of popular bookkeeping software), which is the foundational to making better business decisions.
Budgeting: Usually, the first step to proper financial management is a budget which estimates future income and expenses. You need to track your expenses regularly in order to plan for the future and eventually become profitable.
Savings: Refers to money reserved after all expenditures. Simply put, a portion of income stacked away for future use. It is a good practice for founders to save for emergencies, a singular act that can save a business from collapsing. Financial literacy guides you on best practices for creating savings.
Borrowing: It isn’t necessarily bad to borrow money to finance some activities like purchase an asset, ship a product/service; you just need to make sure you can afford the cost of the loan (principal + interest) and be able to repay the amount collected in due time. Being financially literate means you have a basic understanding of interest rates, payment period, and loan periods, which helps you to make wiser decisions when pursuing a loan.
Investing: Understanding key investing terms is a major component of financial literacy. Some of the components one needs to understand to make better investment decisions include: interest rates, price levels, risk mitigation, capital gains, diversification, dividend, amongst others.
Financial Statements: An understanding of financial statements is fundamental to financial literacy. Founders should develop a solid understanding of records that show the financial activities and performance of a business. The three most important financial statements that must be tracked and updated frequently include: Cash flow, Profit & Loss statement and the Balance sheet. Together these three statements are used by investors to analyze a startup’s performance and earning power.
Remember the goal is to become financially literate and become confident in making decisions for your startup.
So then, ask yourself:
Am I financially literate as a founder and can I make independent financially stable decisions for my startup?
- If Yes, Congrats! Keep learning and soliciting the outside advice you need to continually improve.
- If No, study, study and study. There are many online resources on basic finance concepts. You can check out more articles on finance on our website.
Check out some of our free courses at learn.startupkai.com to learn more!