Is Financial Knowledge Crucial For Startup Founders?

Finance is the lifeblood of business, regardless if we’re talking about tech giants, unicorns, or small early-stage startup projects.

As a startup founder, taking full ownership of the financial aspect of your project can seem scary, especially if you have no background in finance or accounting or a predisposition to mathematics.

Marketing seems intuitive to people with humanities backgrounds, therefore they are not frightened to enter the area. Finance and accounting, however, look as if they have a huge barrier to entry.

This makes it tempting to fully outsource the financial side of your business. While your tax accounting may need specialized skills, outsourcing managerial accounting and finance is not necessarily a smart decision early on for two major reasons.

1. Financial Decisions Are Too Impactful To Outsource

First, the impact of financial decisions could be too big. After all, it is the job of the founder of the startup to decide where and how to use the resources of the organization in order to achieve its goals.

Neglecting the financial aspect of your business can have dire consequences – many small businesses fail as a result of poor cash management. This is especially true for startups, as their revenues can be unpredictable and volatile, and as a consequence fundraising might be critical to success.

In a study conducted by CB Insights, running out of cash and failing to raise new capital was the number one reason for startup failure with 38% of the study participants pointing to it as a major problem. While financial problems aren’t the only problem that can lead to startup failure, they are without a doubt some of the most common.

This means you need to have a good grasp of the fundamental financial knowledge needed to make competent and prudent financial decisions. Budgeting and planning your runway is crucial, and if you want to raise capital – then you’ll have to produce convincing financial projections to attract investors.

2. Startup Finance Is Not Difficult

Second, finance seems to have a very steep learning curve, and while this is true if we are talking about becoming a financial specialist, it is not necessarily the case for startup founders.

You don’t need high-level financial knowledge to make good managerial decisions, especially in the early stages of your startup project (and in the late stages of the project you should be able to afford to hire a CFO if needed).

Generally speaking, all you need is a good grasp of arithmetics combined with good familiarity with a handful of financial and accounting concepts applicable to startups.

You need to know the difference between revenue and profits, direct and indirect costs, debt and equity funding, gross and net margins, and pre and post-money valuation. Moreover, you need to understand the meaning of leverage, dilution, burn-through rate, customer lifetime value, and customer acquisition costs.

While this is definitely not an exhaustive list, being comfortable with these terms means you would have a good-enough fundamental financial knowledge. Consequently, this will make you much more comfortable with making informed financial decisions for your project.

For example, if you are buying and reselling a product, you’d be able to distinguish between the direct cost of each sale (the cost of buying from the supplier) and the overheads (office rent, etc.). With this knowledge, you’ll be able to judge your breakeven and margins with specific sales volumes. Having this depth of knowledge over your business would give you a higher degree of confidence when it comes to making key decisions.

It’s not necessary to be a financial specialist to have a successful startup. Nonetheless, being financially competent is one of the most important skills for startup founders for the simple reason that when it comes to business, almost all decisions have financial implications.

Source: Forbes