As an entrepreneur, it’s not enough to just have an idea. In addition to all the necessary management, marketing, and business development skills that accompany starting a business, a good entrepreneur must also know how to handle the finances of the company. Overlooked and taken for granted all too often, financial literacy can make or break an organization.
Financial literacy doesn’t mean being able to calculate long strings of numbers, it’s really about being able to tell the story of the financials to investors and stakeholders, and being able to make sense of what the numbers actually actually say. It’s no easy feat to learn all the financial fundamentals on your own, which is why Intelligent.ly is teaming up with Dan Allred from SVB to teach you about the financial metrics that matter. He dropped us a line this week and told us all about what it takes to be financially literate.
I.LY: What are some of the key financial metrics that entrepreneurs should pay attention to?
D.A.: Gross margin is easily overlooked by a lot of entrepreneurs. It feels great to get early revenue, but if you’re doing that through low pricing and the gross margin is likewise low, then you are not really building value, especially if it is a model where it is difficult to raise prices as the business scales. Gross margin is the percentage of your revenue that is left after you pay the costs associated with producing and delivering your product or service.
I.LY: You’ve worked with a lot of startups before. Could you talk about the one of the worst financial situations you’ve seen a company get into?
D.A.: The toughest situations I’ve seen are when an entrepreneur and a capital provider (angel, VC, bank, etc.) do not see the future the same way. I can’t stress how important it is to align with your capital providers on how much money you need and how much risk you plan to take with that money. All of these classes of capital (angel, VC, debt, etc.) have pros and cons, and you need to be clear on that going in. You also need to make sure you and the individual providing the capital are aligned on expectations. There will always be surprises, but you have to get aligned as much as possible upfront.
I.LY: What is one of the most common financial mistakes entrepreneurs make when first starting out?
D.A.: Not raising enough money because of concern around valuation. You have to make sure you have enough capital to get through to key valuation inflection points, or the valuation you negotiate upfront will never really matter – you’ll either run out of cash or require more capital at a time when you have not hit your milestones and your investors have all the leverage.
I.LY: Are founders better off hiring someone to do their finances, or can they manage on their own?
D.A.: Founders need to be able to tell the financial story, but they don’t need to do the books themselves. There are lots of great resources available to entrepreneurs, ranging from bookkeeping services that will do routine work to outsourced contract CFOs who will get involved in strategic planning, financial modeling and investor/BOD meetings.
I.LY: What is your top piece of financial advice to someone who is starting a company?
D.A.: Make yourself attractive to capital. Investors and lenders are always impressed when they meet with a company and think “how did this entrepreneur accomplish all of this without any outside capital”? Nothing will endear you more to investors and lenders.