By Jed Simon
There are brilliant technologists and business leaders in today’s tech world, but while startups have their own, great talents, we’re seeing one common weakness: lack of understanding elementary financial concepts.
This impacts long term financial strategy as well as ability to negotiate and set up basic cost structures within the company.
Blame it on business school drop outs, or general lack of exposure to financial principles for building that great idea. It’s a growing trend and even professionals outside financial institutions working with startups have taken note.
Angel Investor and chairman at HDI company, Mark Schwartz told us, “Most companies don’t have people that are finance savvy other than knowing what to put in a term sheet for an initial capital raise.”
Startups forgo hiring a controller to manage the books and create financial reports because of “lean principles.” But even if you aren’t a finance major or don’t employ one, it is every chief executive’s responsibility to understand basic finance principles and how they can affect your business’ bottom line.
Robyn Gould, senior associate at Cooley LLP, a law firm that works closely with start-ups, has also noticed this trend:
“A growing number of our startup clients have developed the most cutting-edge, disruptive technologies, but struggle with determining their monetization strategy and preparing financials for investor pitches – skills that are critical for their ability to raise capital and build a successful business. We hear about startups ‘pivoting’ all of the time – often the most important pivot can be in a company’s monetization strategy. Accordingly, understanding the financial principles underlying such decisions is essential to being able to make these shifts.”To help get all you new and hoping-to-be CEOs started on the right financial footing to ensure confidence from your team and your investors, here are seven basic finance terms that every good entrepreneur knows. We’ve also included a few additional resources to brush up on your Finance 101.
Bottom Line:Net earnings and net income both fall under the “bottom line” description. You may hear people talk about “affecting the bottom line” of the company and this is simply any action that may increase or decrease the company’s net earnings, or overall profit. The term “bottom” is in reference to the typical location of the number on a company’s income statement, below both revenues (top line) and expenses. Needless to say, this is an important term to know.
Gross Margin:Gross margin is expressed as a percentage and represents the percent of total sales revenue that a company keeps after subtracting the cost of producing its goods or services. The higher the percentage, the more the company keeps on each dollar of sales (that will eventually go toward paying its other costs and obligations). In simple terms, if a company’s gross margins are 25 percent, for every dollar of revenue that is generated, the company will retain $0.25 before paying its overhead, which includes salaries, rent, and more.
Fixed versus Variable Costs:A fixed cost is exactly what is sounds like, a cost that does not change with increases or decreases in the volume of goods or services that are produced by your company. These costs are obviously the easiest to predict and plan for. Rent, salaries, and utilities all usually fall into this category.
Variable costs are just the opposite. They can vary depending on a what a company is producing (such as Amazon Web Services usage), and as a result are much harder to forecast.