Everyone always tells the new business owners that their ideas and innovations are what will make the ventures work. You might have heard other people emphasize a businessman's ability to think of the customer's pain points and address them through their products.
Some others also say that it is important to have people management skills in order to build a prosperous business. But what most people tend to forget is that the building block of successful entrepreneurship is the owner's knowledge of the financials.
If you are a new-age entrepreneur, you must be 'financially savvy'. You need to know of all the ins and outs of the finance world and how your business can always stay on top of the finances. As you excel in creating creative proposals while managing the product innovation strategy, your business also needs the right financial metrics. And this can only be possible when you are fully aware of the finances. In this article, we will highlight the meaning of a 'financially savvy' startup owner. We will also discuss all the financial terms you need to know for the improvement of your business. And then, we will give you some tips to work on your knowledge of finances.
What is Meant by a 'Financially Savvy' Startup Owner?
Today's business world requires the owner to have a thorough knowledge of the finances of his entrepreneurship. He should know about the revenues that he is incurring as well as the money being put into collateral expenditures such as marketing costs, customer acquisition costs, etc. Then, he should be aware of the profits that are coming in, or he should also know about the loss his company is currently suffering from. These facts will better equip the owner to devise ways to improve the business so that higher profits can be enjoyed at the end of the day.
Starting a business is incredibly difficult, but maintaining it is even more of a Herculean task. You need to be aware of all the details about the financial side of your business. For example, you are spending some money on a leading brand marketing agency for acquiring customers. For that, you must be aware of some metrics that we have mentioned here:
1.Burn Rate: In layman's terms, the burn rate of a company can be defined as the rate at which your investments are spent before your business starts raking in profits.
This factor can show you if you are overproducing your products even before they can be sold to the consumers. This will help you understand the cash outflow of your business and adjust the spending accordingly.
2.Cash Runway: It is the period of time for which your company can be sustained with the existing amount of funds before it runs out of finances. Calculating the cash runway is of utmost importance as it helps you plan for the future of your business.
You must seek additional funding by making business pitches if your cash runway does not look too promising.
3.Customer Acquisition Cost: Customer Acquisition Cost is one of the most important aspects of any business. Whenever you go for fund-raising rounds or if you are onboarding a new venture partner, you will find that the interested parties will ask about your CAC.
This is basically the amount of money spent per customer for them to check out your brand and buy at least one product. Obviously, your CAC should be adjusted according to the cash you have left in your company exchequer so as to keep your burn rate low.
4.Gross and Net Profit Margins: To understand the effects of any business, it is a must for you to know about its gross and net profit margins. Gross profit margins include the money left with you from your revenue after subtracting the manufacturing costs.
Net profit is a more realistic factor that reflects the amount left with you after subtracting the manufacturing cost, labor cost, factory rent, etc.
5.Budgeting and Forecasting: Now that you are aware of the basic terms related to the financial landscape of a business, you need to know about budgeting and financial forecasting.
As a business owner, you must stay ten steps ahead of the market trends. You should practice presenting the budget for your company every six months. And you should hire a financial helper to forecast the market trends for you in the near future.
At the end of our discussion, you should hopefully know about the nuances of the financial side of your business. You are also aware of the basic terms you must understand to stay on top of the earnings and expenditures of your business. No matter how many accountants you hire, you should have proper knowledge of the root of your profits in your business so that your venture only flourishes more and more in the future.