Financial Knowledge You Need to Succeed
Financial literacy is an important subject. Fortunately, there are many financial literacy initiatives that address students, families with lower income, and the elderly. These efforts may not be enough, but they exist, they are growing, and hopefully they will eventually make a significant impact. In the meantime, there is another group of individuals who are also lacking when it comes to financial literacy. Surprisingly this group consists of entrepreneurs. Or, maybe it isn’t that surprising. Have you ever watched an episode of the famous television show ‘Shark Tank’? Entrepreneurs appear on the show to obtain funding from super rich investors. In so many cases, the entrepreneurs know their products inside out, they’ve obtained patents, and display genius when it comes to sales and marketing. Then, the numbers questions roll in. What’s your valuation? What is your customer acquisition cost? What are your assets worth? This is when the blank stares and stammering begins. This is when it becomes clear that a genius entrepreneur can have a major learning curve when it comes to understanding financial terms.
Whatever your financial understanding is, fortunately you can benefit from this list of financial terms and suggestions about using them in your business models and pitches:
Customer Acquisition Cost: Getting customers interested in a product requires that money be spent on marketing, advertising, market research, etc. Customer acquisition cost is the cost that is derived from all of these efforts. The lower the customer acquisition cost is, the better.
Equity: Equity is ownership. This is the percentage of a business that somebody owns. An entrepreneur can have an equity stake as the owner of a business. An investor can demand equity as a condition of their investment. The more money invested for less equity is beneficial to the startup.
Royalty: A royalty is an amount of money collected with each sale. Some investors will ask for a royalty instead of equity, others will ask for both. A royalty can be something that is paid over a limited amount of time, or in perpetuity. Investors will often ask for a royalty instead of equity if they see sales potential. Deciding whether or not to offer a royalty or an equity stake is a strategic move either on the part of the investor or on the part of the entrepreneur.
Valuation: This is the amount of money an investor thinks a company is worth. The amount of money they are willing to invest in exchange for a percentage of equity is what determines valuation.
Market Share: This reflects a company’s dominance in their business sector. The bigger the market share, the more a company is outdoing its competition.
Obviously this is a brief list of financial terms. There are also several others. The major point is that entrepreneurs must know basic financial terms and their meanings when they are approaching investors about their company. Lack of this sort of knowledge will drive investors away, and it will also put entrepreneurs and their business pans at risk if they are taken advantage of by people who will exploit their lack of financial understanding.
Before they approach investors for major funding, entrepreneurs should make sure that they are fully financially literate. It is this combination of innovative genius, technical skill, hard work, and financial knowledge that business owners can use to attract new funding dollars. When schools, banks, and communities create financial literacy programs, they should consider targeting entrepreneurs too. Another solution could be hiring a young professional with finance and accounting resume. After all, it would be a shame to see innovative products and services, hard work, and entrepreneurism wasted over financial knowledge that anybody can master.