Basics of Business Finance For Entrepreneurs
Finance is the most crucial aspect of a business. Many business owners ignore the importance of and don’t take business finance seriously. They don’t have knowledge about business finance and how to manage finance in business. They are not able to manage finance effectively, and that’s why lack behind in business. But why do most Entrepreneurs suck at business finance?
Do you know what entrepreneurs hate the most other than a boss?
Accounts!!
The most boring invention of human beings.
Daylong number crunching and endless stare at typical bar graphs which you understand nothing about.
What can be worse than that, especially for Entrepreneurs like me who hate math and statistics?
But no one can deny that financial management can make or break a business.
Bad Finances are the 2nd most essential reasons why a startup fails?
Managing finances has nothing to do with how much money you have.
Even well-funded start-ups run out of funds, while a bootstrapped business with starting capital of $500 can make it big.
But can you manage your business’ finances even if you are an entrepreneur who hates numbers?
In short, the answer is a BIG YES!!!
This is a myth that you have to be an Accountant to handle business finance as an entrepreneur.
But nothing can be far from the truth!!
There’s no need for you to go to school and get a finance degree.
You don’t have to be an expert at it.
For example, You know how to run, right?
You didn’t learn running to beat Usain Bolt, isn’t it?
You know just enough to get it going, the same is with business finance.
So here are a few essential concepts of finance that young entrepreneurs should understand in order to budget and manage their money effectively.
The first is net worth. Your net worth is calculated by subtracting your total liabilities from your total assets.
For example: If you own a house worth $1M and have a debt of $250k then $750K is your Net Worth.
Fun Fact: World’s Poorest Person has a net worth of -6.9Billion Dollar
Yes, a Negative Net Worth.
It’s important to track your net worth over time so that you can see whether you’re making progress in building wealth.
Another key concept is budgeting.
A budget is simply a plan for how you will spend your money each month.
It’s important to be realistic in setting your budget and to make sure that it allows for some savings as well as spending on necessary items.
You may also want to create different budgets for different purposes, such as one for day-to-day expenses and another for long-term savings and investment goals.
You can use a variety of free software online to manage your business’ finances.
Financial Ratios
If you hated maths in your school days you might not be the biggest fan of ratios.
But believe me, it isn’t that hard.
As an entrepreneur just starting out you should know about financial ratios and how they can be used to measure their financial health.
Financial Ratios are a quick way to diagnose your company’s health.
Some of the most common ratios include the debt-to-equity ratio, the gross margin percentage, and the return on assets (ROA) percentage.
My friend, don’t be afraid.
You will get them in some time now.
The Debt-to-income ratio, measures how much debt you have relative to your income.
For example, if Your business generates a profit of $100 and you have a debt of $20 then you have a debt to income ratio of ⅕.
This number can help you gauge whether you’re taking on too much debt or whether you have room to borrow and insights into how you are budgeting and managing your money.
As an entrepreneur, you need to be aware of your debt levels. When you’re starting a business, it’s important to borrow money carefully, and only when you need it.
You don’t want to get into too much debt and risk bankruptcy, right?
Here are 3 things you should keep in mind when borrowing money for business:
- Make sure you can afford to repay the loan.
- Make a plan for how you will use the money.
- Shop around for the best interest rates.
Don’t take me wrong I am not saying debt is bad.
Credit can be a powerful tool for growing your business, but it’s important not to overextend yourself.
Make sure you’re always able to make at least the minimum monthly payments on any outstanding credit cards or loans so you don’t end up with a bad credit score
Another critical concept is cash flow, which is the movement of money in and out of your business.
You need to make sure you have enough cash coming in to cover your expenses, otherwise, you’ll run into financial trouble.
One way to improve your cash flow is to offer discounts for early payment or create a subscription model where customers commit to paying a certain amount each month.
But make sure while giving discounts you don’t run in losses.
Young entrepreneurs must take care of a few things while managing cash flow.
First, they should track their expenses carefully and ensure they are not spending more than they earn.
They should also be mindful of the terms of their loans and credit cards, and make sure they are not racking up too much debt.
Additionally, young entrepreneurs can find ways to bring in more revenue by expanding their business or finding new customers.
Finally, they can find ways to reduce costs by negotiating better rates with vendors or finding cheaper alternatives to expensive services.
Learning the Basics of Finance:
Most young entrepreneurs are impatient and manage business finances hastily. But first, they should learn the basics of business financial management.
They need to know how to read and interpret business financial statements. Financial statements show a business’s financial position at a given time. They include a balance sheet, income statement, and cash flow statement.
Second, young entrepreneurs must know how to budget and manage their money. This includes learning how to set goals for their business and themselves and figuring out how much money they need to make their business successful.
It also includes knowing how to save money and make wise investments.
Applying Finance Knowledge to Your Business:
Once young entrepreneurs have learned the basics of business finance, they need to start applying it to their businesses.
This includes understanding their business’s financial position and making informed decisions based on that information.
They should also know how their business’s finances impact their customers and employees.
Understanding finance is an essential skill for any entrepreneur.
By learning the basics of business finance, young entrepreneurs can set themselves up for business success.
