Starting a business is an exciting and challenging endeavor that requires a lot of hard work and dedication. One of the most important aspects of starting a business is understanding and managing the financials. In this blog, we will cover the basics of startup financials and the key financial metrics that every entrepreneur should be aware of.  Awareness is the watch word here, because so often in a startup, we just don’t have the information that mature businesses have so we’re learning all the time.  As Wil Schroter says referring to startup finance, “Early on, it’s all questions and no answers”. So, the earlier a founder builds a forecast and starts asking questions and learning about the business, the sooner some answers will start to come. 

The first step in understanding the financials of a startup is to create a budget. A budget is a financial plan that outlines the expected income and expenses for a specific period of time, usually a year. It is important to create a budget as soon as possible, as it will help you understand your financial needs and ensure that you have enough money to cover your expenses. 82% of startups fail due to cashflow problems, so properly understanding incomes and expenditures is crucial to survival. 

Once you have a budget in place, you should focus on creating financial statements. Financial statements are a set of reports that provide information about the financial performance of a business. The three most important financial statements for a startup are the income statement, balance sheet, and cash flow statement.

The income statement, also known as the profit and loss statement, shows the revenue and expenses of the business over a specific period of time. It shows whether the business is generating a profit or a loss.

The balance sheet is a snapshot of the business’s financial position at a specific point in time. It shows the assets, liabilities, and equity of the business. It is important to have a strong balance sheet as it indicates the business’s ability to pay its debts and continue operating.

The cash flow statement shows the flow of cash in and out of the business. It is important to have a positive cash flow as it indicates that the business is generating enough cash to cover its expenses.

In addition to these financial statements, there are several key financial metrics that every entrepreneur should be aware of. These include:

• Gross margin: This is the difference between revenue and the cost of goods sold. It indicates how much profit the business is making on each product or service sold.
• Operating margin: This is the difference between revenue and operating expenses. It indicates how much profit the business is making after all expenses have been taken into account.
• Return on investment (ROI): This is the return on the money invested in the business. It indicates how well the business is performing in relation to the money invested.
• Debt-to-equity ratio: This is the ratio of debt to equity in the business. It indicates the level of leverage in the business and the ability to pay off debts.
• Current ratio: This is the ratio of current assets to current liabilities. It indicates the ability of the business to pay off its short-term debts.

In conclusion, understanding and managing the financials of a startup is crucial for its success. By creating a budget, financial statements, and being aware of key financial metrics, entrepreneurs can ensure that their business is on the right track and make informed decisions to drive growth and profitability. It is important to keep in mind that financials are not a one-time task but rather a continuous process that requires monitoring, analyzing, and adjusting as the business evolves.

A founder’s priority will always be their product or service – the thing they’re most passionate about, and the chances are that doesn’t include their financial model.  Numberly’s friendly experts, who’ve all been founders themselves are uniquely placed to help you.  Working closely with you, they’ll create a tailored model that will reflect the uniqueness of your business and be super simple to use.  Reach out to them for an introductory chat at numberly.io