Finance is the lifeblood of the businesses is an age-old concept, which can be viewed as a foundation stone for any startup. Even the facts and figures agree with the statement wholeheartedly, as the lack of Funding and inefficient use of available finance prevails as one of the core reasons behind the collapse of even seemingly promising startups. Inadequate knowledge about the basic aspects of finance and their practicability has also been playing the malefactor for the entrepreneurs, which has initiated the doom of nearly 30% of total failed startups. The piece eyes at discussing some of the basic concepts associated with finance that an entrepreneur should be cognizant of.
Basic tools for financial accounting and analysis
The following are some of the basic tools in financial accounting and analysis which every entrepreneur should possess a good knowledge of.
Income statements and Balance sheet
The income statements comprise the trading and profit and loss account, which are prepared from the ledger entries at the end of the year. The purpose of the trading account is to reveal the gains made out of the difference between direct expenses and direct income, while the profit and loss account reveals the net profit, which is the difference between a complete set of transactions as expenses and income. The balance sheet is the statement that displays the current shape of the company in relation to its assets and liabilities owned.
Financial ratios and Cash flow statement
Simply put, financial ratios are one of the most applied and proven techniques to analyze the financial sphere of any business. With the available accounting data, they will analyze the profitability, liquidity, solvency, efficiency, etc., that were the results of the financial activities the firm has participated in. The cash flow statement, on the other hand, is a tool that provides the firm with all the insights into the inflow and outflow of the cash and cash equivalents, stating the immediate solvency and financial position of the company. They are advised to be prepared monthly or even quarterly to keep a close and regular check on the flow of cash, in and out of the organization.
Financial planning and Funding
The process of financial planning takes comparatively lesser financial and accounting tools into account and prioritize the managerial and strategic approach of planning. With the aid of the numbers generated from the financial analysis, the financial plan from thereon is formulated. This is a more strategic approach that involves studying of the results of the analysis, developing a plan and further execute them with the help of the funds raised. A solid, detailed and ambitious financial plan is necessary in order to pitch the idea and raise funds from different sources.
Significance of financial aspects in Funding
The process of raising funds is regarded as one of the most tiresome and crucial activities associated with the practice of entrepreneurship. Usually, an entrepreneur with an idea face the dilemma of choosing the major source of funds from the variety of options available before them. Similar to their finances, they have to analyze each and every source inside out before settling in for the one which is going to be the possessor of the major source of funds. Apart from the idea of self-financing, which is not advisable to settle low if the initial investment requirements and operational costs are high enough, the entrepreneur may go for loans from outsiders. The loans don’t escape a price that will remain hanging over the startup until it’s completely repaid. This leaves the entrepreneur with the option of raising funds from the angels and venture capitalists. They provide the entrepreneur with the required amount of capital and even assist them with initiating the activities of the startup by giving away suggestions and advice and, most importantly, ease the workload of the entrepreneur for a price.
The selection of the entrepreneur’s idea and funding decisions completely depends upon the projected financial plan provided by the entrepreneur, followed by the practicability and
marketability of the idea. In short, all the major decisions associated with Funding are taken
on the basis of the financial plan and the projections displayed via the numbers. The numbers
also need to satisfy the potential Investors, who are the biggest catch for every entrepreneur.