Should all startup founders have basic knowledge of finance? This is a common question and before digging into details, here is the short answer, Yes, startup founders do need to have basic financial knowledge, and here is why. As a founder, there is so much you need to know aside from having a great idea. This includes; a good grasp of the industry, business operations, product development, and marketing. But all of these are not possible without finance. You can view finance as the engine room of a startup. If there is a problem with the finance, the whole business suffers. Statistically, many startups fold up because of inadequate funding, but what happens to the ones that do get the funds yet still fail? 

The number one reason why small businesses fail

Failure rates for startups are staggering but it might surprise you to know that the number one cause of failure isn't always inadequate financing but rather poor finance management which leads to cash flow problems. This is responsible for 82% of startup failures according to BusinessInsider. While only 29% of failure occurs because a business runs out of cash. 

What is cash flow? It is the net amount of money that is transferred in and out of the business. When the business cost more money to run than it makes (that is cash outflow is greater than cash inflow), then there is a problem. A cash flow problem is often the symptom of an underlining problem or several underlying problems, most of which indicate inadequate finance management skills. Some of these are;

1. Underestimating startup cost
2. Not maintaining a proper cash flow budget
3. Wrong estimates of cost (both direct and indirect cost)
4. Unrealistic profit expectations
5. Scaling up too fast
6. Low-profit margins

But if you are still not convinced about the importance of acquiring financial skills as a founder, then perhaps the next section will give you the push you need. 

Do investors value startups with founders who have financial knowledge?

Every startup at some stage will need external funds if it is to survive. Investors, whether personal investors or venture capitalists have a checklist of qualities they look out for in a startup before investing in it. Most times, these startups have nothing to show for themselves and all investors use to decide if a startup is worth their money or not is the people (founders), the idea, and the research that supports the idea. So what do investors look for in the founders of a startup[?

To answer that question, here is a case study carried out by researchers at Jacobs University in Bremen, Germany. In this case study, researchers examined 130 international student-run startups to find out if the founder’s financial knowledge is important to an investor. This was their conclusion;

“This paper finds that founding teams with at least one member having a financial education background provide more useful and specific financial information in their business plans. However, the readability of this information is lower than that of teams with no such educational background. Moreover, the results suggest that investors regard founding teams comprised of at least one team member with financial education as more capable and competent.”

Reasons why a founder should be financially savvy

When it comes to having basic knowledge of finance, an entrepreneur is not different from any other individual, except that for an entrepreneur, the cost of poor financial knowledge is much higher. If you are an entrepreneur, here are three reasons why financial literacy is a must for you.

It gives you more control

Money drives the business. In their early stages, many startups are yet to be profitable. That is, they do not generate enough money to be self-sustaining. External funds are needed to keep the business afloat until it becomes profitable. How this money is used is very important because it determines the direction the business will take. 

Given this fact, one can see why it is a bad idea to delegate most or all financial decision-making to a third party. Anyone who determines where the money goes, how it is being spent, and what it is being spent on is the one with the key to the business. It is only fitting that the founder is the one that holds this key in order to have better control over the company. 

It makes you look capable and confident

From the case study referenced in this article, I believe this point is clear. Investors need to know how their money will be spent to achieve business growth. It is not all about having a great idea. So founders need to incorporate some financial jargon and even throw in relevant financial calculations to back up their claims when pitching an idea to investors. This can improve their chances of getting funded. However, without any financial knowledge, it will be difficult to pull this off. 

It helps you make better decisions

The average person makes about 35,000 decisions per day. This number is likely going to be higher for founders who have to make both personal and business decisions. With so many decisions to make and so little time, the chances of making a bad decision increase especially when one doesn’t have the necessary knowledge with which to make that decision. 

Founders have to make quick decisions that hugely impact the company. Most of these will fall back on the financial situation of the company. If the company is running on a tight budget, then decisions have to be made with this in consideration. With financial literacy, founders are in a better position to make these decisions without compromising the future of the company.

In conclusion, having financial knowledge is not only helpful in running the startup but also in getting investors to back your ideas.