Do You Have Financial Intelligence?
Have you seen a Cash Flow Statement? Do you know what an Income Statement is? Can you read a Balance Sheet? Well, as an entrepreneur you need to understand the message that each of these simple reports convey.
A Cash Flow statement provides a picture of the movement of real cash into and out of your business.
A company’s financial performance over a period of time is depicted in the Income statement. The period may be a year, a quarter or a month.
The Balance sheet is an account of the assets and liabilities of your company at a particular point in time.
Daymond John once said -I’m a big advocate of financial intelligence.Yes, what you need is to acquire financial intelligence. However, I am not suggesting that you learn accounting or go through a course on “Accounting for Dummies”.
Correct me if I am wrong -Your aim is to run your startup more effectively, right? To achieve this singular goal you will need to know enough about finance to be able to talk sense with financiers, with statutory authorities and with business partners and suppliers. Too many startups have crashed because none of the co-founders understood finance and its implications.
Like a picture describes a scene more eloquently than a battery of words, numbers describe a business more accurately than any other form of communication. The first and foremost action you need to take is to remove any fear or self-doubt with respect to financial terms and reports. The rows and rows of numbers can make financial reports appear intimidating and mystifying. I do not think it will be any different if you were to learn a new language.
To succeed in your business you need to understand the business language of finance. You should be familiar with some of the financial terms, you should know how the data is collected and how to interpret the different financial reports. You can employ CAs and other finance professionals to prepare your financial records. But it is you who will have to understand the picture drawn by the reports and take decisions based on your interpretation.
Financial issues rank second in causes for startup failures. Out of 20 failed startups that were interviewed, around 7 listed financial issues as one of the reasons for their failure. The reasons giving were raising capital, cash flow, pricing, break-even estimations, currency fluctuations and raising cost of resources.
If you don’t know your numbers, you don’t know your business period.
YourStory, had published an article in 2014 (the link to the article is mentioned in the references), where they have shared stories of twenty failed startups. These stories are narrated by the founders themselves giving their interpretation of how and why the startup failed. Here are some of the stories.
You may not have heard of Dazo, a small food technology firm. Dazo had to shut down within a year of launching. According to Shashaank Singhal, former CEO of Dazo: -We were scaling up and were looking to get into more cities, but were short on capital. At some point we felt we were lagging behind other players and decided to quit.
According to reliable sources, food-tech start-up TinyOwl Technology Pvt. Ltd faced delays in closing its next round of funding. This resulted in a round of job cuts and expansion plans had to be put on the back-burner.
DoneByNone was a web-only women’s fashion brand operating out of Gurgaon. They also faced challenges in raising further capital, prompting the co-founders to quit and take up regular jobs. They were in competition with startups like Zovi and YepMe.
In 2013, after three years of running, Flud, the social news reader for iOS, Android and Windows Phone, had to fold up as it ran out of money. Flud was doing very well and had raised $2.1 million in the seed stage. They were in the process of raising another $8 million when they closed shop. This goes to show that even well established startups can be hit by financial issues.
SchoolGennie was a startup that created an enterprise resource planning (ERP) tool for schools to enable them to manage everything from fees, inventory, communication with parents, and so on. After 11 months they had to pack-up without having sold even one license. Inadequate financial planning was one of the reasons which ultimately led to cash flow issues.
Imagine the world of mobile based on Nokia and Motorola if Apple had not been restarted by a missionary entrepreneur named Steve Jobs who cared more for his vision than being tactical and financial. Vinod Khosla
Most can’t emulate Steve Jobs who could ignore being tactical and financial and focus on his vision. You need to give due respect to the financial health of your startup if you want to avoid the pitfalls that trapped the failed startups. Why give failure a chance to catch you on the wrong foot? Along with being technically savvy, be financially intelligent and be one step ahead of the rest.
1. Alfred Edmond, Jr. 3 Mistakes Entrepreneurs Make With Their Financials. 2013. http://www.blackenterprise.com/small-business/3-mistakes-entrepreneurs-make-with-their-financials/
2. Dr. Tom McKaskill. Understanding and Using Financial Statements, Budgets and Cash Flow Statements. 2011. http://www.drexit.net/financialinformation.html
3. Lauren Seymour. Financial tools all entrepreneurs should understand. 2014. https://www.marsdd.com/news-and-insights/financial-tools-entrepreneurs-understand/
4. Jed Simon. 7 financial terms every serious entrepreneur should know. 2013. http://venturebeat.com/2013/06/08/startups-financial-terms/
5. Acton. The Only Three Reasons Entrepreneurs Need Accounting and Finance. 2012. http://www.forbes.com/sites/acton/2012/09/15/the-only-three-reasons-entrepreneurs-need-accounting-and-finance/#73f024425015
6. Jubin Mehta. Early stage Indian startups that shut down in 2014. 2014. http://yourstory.com/2014/12/indian-startups-shut-2014/
7. Eileen P. Gunn. Five Common Startup Money Mistakes. 2011. http://www.entrepreneur.com/article/219368
8. Erica Nicole. 10 Small Business Financial Challenges (Solved). 2013. http://yfsmagazine.com/2013/04/11/10-small-business-financial-challenges-solved/