Blog: Finance Not Just For Bean Counters
By Dick Dadamo
This is my favorite title for my finance seminars for entrepreneurs. Numerous articles show the biggest reason for startups to fail is because of poor cash management. No doubt the very first thing needed for the entrepreneur is to prove and validate the concept or product that is needed in the marketplace, but an understanding of cash management is a requirement for the chief executive for building and operating a company.
Most of what is needed is not taught in the education system therefore the chief executive has to get a great understanding of finance needs from experience, but that can take too much time. This skill can be accelerated with mentors and coaches because seldom does a startup have an experienced finance person on the team.
The ultimate in building and operating a company centers on finance and starts with the understanding of the financial projections needed to raise money from sophisticated investors.
In my presentation I start with the Balance Sheet, a vital need for planning but I believe it is underutilized, until its understood and experienced.
Most emphasis tends to be on the P&L but that's just a short-term. The Balance Sheet is basically the Vital Signs of the Company and needs to be utilize for the long-term planning.
It can be helpful in understanding the cash that will be needed to build the company to the ultimate goal.
- The Profit and Loss Statement (P&L) structure needs to be understood in a relationship of revenue, and margin, expenses, and profit. Too often profit is called income and margin is called profit.
- The Cash Flow projections needs to be continually reviewed as noted above the importance to make sure the company does not run out of it
- The Breakeven Analysis defines the revenue to cover all expenses to ensure survival as the company goes along.
- The Burn Rate is keeping an eye on the available cash, and based on the monthly operating needs, it will determine how many months the company can go on without more cash in.
- The Budget is the scorecard for operating a company and reports are needed to operate the company and compare the performance to the budgeting.
I have been on panels at a local university at the end of semester for a class that requires building a business plan throughout the semester. Quite frankly many of these presentations are just numbers and do not have the depth that is needed to go forward. For instance, when a company was going to do $200 million in the second year, or another company spending money on an algorithm to provide a service to restaurants based on data only from the Internet, but had not talked to even one restaurant in the area. So is not unusual for an inexperience entrepreneur to be naïve.
My point is, in working with founders and student entrepreneurs, I emphasize the need of the chief executive officer of their company has to have a broader understanding that goes far beyond validating the product.