Finances can be one of the most difficult areas for any entrepreneur, especially if you don't have experience in it. Having the help of an expert mentor in this field can be one of the keys in order to avoid mistakes. For this reason, startups at La Lonja de la Innovación enjoy the help of Juan Manuel Llinares who, as a bank employee since 1997, has extensive experience in the sector.
However, many entrepreneurs don’t have access to this type of help and advice, especially when they are just starting out. For this reason, many times entrepreneurs must carry out these tasks on their own that they have never faced before, as limited resources prevent them from hiring a third party to handle them. If this is your situation this post will make the process easier by explaining the basic finance concepts every entrepreneur should know.
Basic concepts of finances
To prevent you from feeling overwhelmed by not understanding basic financial concepts, here are some of the most fundamental ones to help you manage your business properly:
- Budget. One of the most basic concepts to start with. The budget is what enables all financial planning for your company because it helps you allocate resources efficiently, control expenses, and set realistic goals. Having a well-defined budget allows you to anticipate income and expenses and thus avoid surprises
- Assets. This concept refers to the tangible and intangible goods that your company owns, which are intended to generate benefits, whether economic or not.
- Liabilities. These are obligations or debts you have with third parties, such as employees or suppliers. The liabilities require you to spend money recurrently and don’t generate income, but allows you to finance your operations.
- Opportunity cost. This concept refers to the benefits you lose when choosing one alternative over another when making a decision. In other words, it’s the resources you give up for not choosing the best possible alternative. This concept helps you evaluate the impact of each choice.
- Creditors. They are individuals or entities who you have a debt with after contracting their services or buying a product, in other words, you owe them money. One of the most common is the bank, which often grants loans for companies.
- Cash-flow. Represents all the money inflows and outflows over a period of time. It is the result of subtracting payments from charges, i.e., the net money that your company has in a given period of time. It is very important to have it under control, as it ensures the liquidity of the business.
- Break-Even point. This is the sales point needed to cover all costs and expenses without generating a profit or a loss. In other words, it is the point at which the costs are the same as the revenue, a zero profit and loss point.
- Balance sheet. It is like a report that reflects the financial position of a company in a given period of time, offering a general and complete overview of the assets, liabilities and equity of the company. An essential tool for measuring the performance of and making decisions.
- Liquidity ratio. This refers to the ability of a company to meet its short-term financial obligations. It’s an important indicator to evaluate the company’s solvency.
- Return on Investment (ROI). This is the period of time an entrepreneur or business owner needs to recover the investment made. It allows you to evaluate the profitability of an investment. If the ROI is high, the investment is profitable.
- Profit Margin. Also known as gross margin, it is the profit a company makes on a good or service, meaning the difference between the product’s retail price and its production cost. It is highly useful for assessing the profitability of a business.
The importance of controlling the finances of your company is not small, since every business has to face payments, assume taxes, look for sources of financing, control its balance sheet, etc. But this area can be complex to control, so more and more entrepreneurs are choosing to continue attaining and taking courses on finance and administration to be able to run their business properly. However, although having training in this area can be of great help, it is not essential, but it is enough that you have an interest in understanding how it works and learn on your own what is necessary. The first step is to understand these basic financial concepts that we have left you with so that you don't get lost when you start your business.