Financial Terms You Must Know Before Planning For A Start-Up

A company which is just starting new, needs to tread cautiously and measure every move it makes. You cannot just build a company out of thin air. It takes years and years of planning, hard work and patience. Only then can you hope to get all the things together to start your company. Also, you need just the right people to handle the finances, take care of the clients and look into the research and development wing of the company.

Starting a company and then hoping to run it braving every impediment takes a lot of heart, and requires the right skills. A start-up walks on wafer-thin ice, which is why everyone taken on board needs to cooperate and dispense off their duties with perfection and dedication.

One of the most important aspects that you must keep in mind when you have a start-up to run is the company’s finances. Every company needs the right amount of funding and investments to run, without which you cannot hope to last for a long time in the market. The competition is fierce, and other companies are always scouring for chances to lay waste to their competitors. Managing the finances of a company is different from running your family, which requires planning for personal finance, retirement and much more. Though both involve several financial intricacies, businesses work on a whole another set of rules. Therefore, before you take the plunge of starting up a company, there are few financial aspects that you need to consider.

Accounts Receivable:

To be able to run a business, you do not need to take up a course and learn everything, as you would eventually gather experience and learn as you foray further into the market. However, there are certain concepts related to business and financing that you cannot do without. One of those concepts is the term Accounts Receivable or AR. Accounts Receivable, in the simplest words, is the amount that your company is due to receive from a client or a customer after you deliver a product or service to them. The money does not show up in the bank, but instead is marked in the AR. There are several other concepts that come along with AR, the knowledge of which is essential. You must be careful of the transactions since companies tend to run into financial troubles and incur losses owing to insufficient knowledge and skills in handling this very aspect of finance.

Accounts Payable:

Accounts Payable or AP, is similar to Accounts Receivable, but in this case, you are the client who owes money to another business. Your company buys a good or service from another company and is handed over an invoice. In this case, you need to pay the money for the service or goods. Now, it is essential to remember that businesses do not immediately pay back the money when they buy a product or service.

Every business takes a specific period within which the money needs to be paid in full. Sound financial management does not mean paying money for the service or goods you purchased immediately because you feel that it would keep your company in the good books. Good financial management instead means, to look into the economic interests of your company, and then set up a schedule accordingly to pay back the money. There is a very thin margin between being a defaulter and working out the best ways to pay back. You must, at all costs, stick to an appropriate margin.

Inventory:

It gets tricky in this part because money on inventory and money in the bank are entirely two different concepts. It is also not going to show up in the Profits and Loss (P&L) until and unless you sell the goods or services and get the cost out of them. It has often been observed that companies that ride high in the P&L might find themselves running out dry in the bank if their inventories choke up. Therefore, you must snap out of your bubble of ignorance and imbue yourself with the fact that the figures in the P&L do not guarantee a secure and profitable future for your company.

Debt and Assets:

You must keep in mind that the money you use to repay your debts will not show up. The only part of the debt that is registered is the interest that you pay on the principal amount since that is the extra expense. However, debts do not equal to expenses since you owe your client or any other entity money. You have to be careful while planning finances required for your future, and consider the amount that needs to be repaid.

There is also the aspect of assets that you need to keep in mind. Funnily enough, buying stuff like computers and furniture for your company will blow a hole in your finances, but it does not count as the expenditure. Therefore, keep a separate ledger of debts that need to be repaid and the assets that you buy for your company, to be fully aware of the expenses.

Fixed Costs and Variable Costs:

Simply put, the fixed costs of a company can be regarded as the rent you pay for your set up, the furniture or the other equipment you use. The electricity bill, salaries of the employees also come under your fixed costs. Variable costs are the ones that are prone to vary under certain circumstances. They are generally the raw materials used, production output, etc. While running a company, you must keep in mind the fixed as well the variable costs to be able to take better financial decisions.

The most basic and vital terminologies related to finance and economics have been covered in this article. However, this in no way can serve as the be all and end all of managing finances. Running a company is a whole another ball game and requires business acumen. Therefore, invest time in updating yourself by keeping a weather eye on the business market and plan accordingly.

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