TECH in AMERICA (TiA)

SHARING AMERICA'S TECH NEWS FROM THE VALLEY TO THE ALLEY

7 financial terms every serious entrepreneur should know

finance-101[1]
7 financial terms every  serious entrepreneur should knowby Jed Banks (courtesy VentureBeat)
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.

Equity versus Debt:

The “equity versus debt” comparison may seem silly to some, but you would be  surprised at how many people I have come across who have no idea what either  really means. Equity is simply money obtained from investors in exchange for  ownership of a company, while debt comes in the form of loans from banks that  must be repaid over time. Both are necessary for growth, with their own pros and  cons. Equity versus debt is a critical decision for any entrepreneur and it is  important to know the difference as the future of your business may depend on  it.

Leverage:

Leverage can be interpreted a couple different ways. In the financial world,  leverage is most commonly known as the amount of debt that can be used to  finance your business’ assets. In simple terms, the amount of money you borrowed  to run your business. The balance you want to strike as an entrepreneur is that of your debt and equity. If  you have way more debt than equity, you will be considered “highly leveraged” aka “very risky” to potential investors.

Capital Expenditures (CapEx):

Capital expenditures are any items purchased by your business that create  future benefits. Basically, if something you bought is going to be useful to  your business beyond the taxable year in which you purchased it, capitalize the  item(s) as assets in your accounting. Examples include computers, property, or  acquisitions.

Concentration:

Concentration is simply the measure (usually a percentage) of how much  business you are doing with a specific client or partner. Relying on one or a  couple of clients and partners to do business is a prime example of  over-concentration. This is a losing strategy for any business because if  something goes wrong with those limited relationships your business will be in  serious trouble. Focus on keeping low concentrations for your accounts and  investors will be impressed.

Resources:

Looking for more info? Here are some resources that you can use to get up to  speed on your financial terms and concepts:

“The Intelligent Investor” by Benjamin Graham: This is The  Bible to many investors as Graham was a mentor to Warren Buffett. What better  way to think like an investor than learn from one of the all-time greats?

Wall Street Journal: If you don’t read it already, start. Every investor  reads the Wall Street Journal, and staying up on markets is beneficial to any  type of entrepreneur.

Bootstrap Finance: The Art of Start-Ups by Amar V. Bhide:  Bhide has done a few very insightful pieces on entrepreneurial finance. This one  is in the Harvard Business Review. I highly recommend checking them out.

Financing Options: Convertible Debt by Fred Wilson: Fred has  written several in-depth posts as part of his MBA Monday column. His insights  from the VC perspective are invaluable for any business leader.

The U.S. Small Business Administration has a wealth of resources  including articles such as: Estimating start-up costs, Developing a cash flow  analysis; Borrowing money for your business; Preparing financial statements, and  more.

Big Data and Predictive/Real-time Analytics  startups: Are you looking to jumpstart development & accelerate market  traction? Sign up for the SAP Startup Focus program to receive technology,  support, resources and community to help you develop new applications on SAP  HANA, a cutting edge database platform. Get started here, and enter promo code “VB2013″ on the form.

Thank you. TiA.

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