Founders need to build up their portfolio with key skills that will come in handy in the course of running a company. I have hinted at these skills in different articles but let me reiterate. One of the first is; marketing skills - Every founder needs to know how to sell their idea but most importantly, they must know how to sell themselves. 

People skills; founders need to be effective communicators. They should be able to motivate, inspire and build a team that is capable of believing in their dreams and working with them to make them a reality. Lastly; Financial skills - founders need to be financially literate. This does not mean they need to acquire a degree in finance, but they should have enough understanding to carry out basic financial calculations and interpret financial reports. 

To know more about why it is important for founders to be financially literate, read this article. As a follow-up to that article, here are 3 financial skills we believe startup founders need to have. 

Understanding Cash Flow

Cash flow is one of the foremost financial skills a founder should acquire. It is a measure of the inflow and outflows of a business. Cash flow is an indicator that can be used to know the financial situation of the startup. If the net outflow is greater than the net inflow, then the company could run into financial troubles. Understanding cash flow and learning how to manage it will help the founder easily forecast the company’s revenue and expenses. 

With this knowledge, the founder can determine how long the present financial resource will last. Also, a good cash flow statement will reveal the core assets and liabilities of the company. Which assets are still viable and which ones are no longer viable (or obsolete) and should be let go? These are some of the questions that a founder can answer with the help of cash flow analysis. 

Understand the income statement 

Although they are quite detailed and informative, cash flow statements do have their limitations. Cash flow shows liquidity. It lets the founder know if enough money is being made to cover expenses and keep the business running smoothly. Subtract the net outflow from the net inflow and you get the net cash flow. 

But this doeCash flow statements don’t take into account non-cash accounting items like depreciation. On the other hand, the income statement (otherwise known as the profit and loss statement) clearly indicates if the company is running at a loss or not. It also considers non-accounting items like depreciation as well as the revenue and expenses the company incurred. 

Despite their differences, the cash flow statement and income statement are inseparable. For effective financial analysis, both statements are often used together. The cash flow statement begins with the net profit or loss determined using the income statement. Then the actual cash flow of the business is then calculated by subtracting non-cash items. This method is known as the indirect method. 

Understand the balance sheet

This is one of the three key financial statements in a company. The other two are the cash flow statement and the income statement that we’ve already talked about. So what makes the balance sheet different from the other two and why is it important to understand it? 

A balance sheet is a financial document that shows the assets and liabilities of a company as well as the equity at a given time. The information provided in this document can be used in calculating the rate of return and deducing the financial well-being of a company. The rate of return is important to investors since it gives them an idea of what they stand to gain by investing in the company. The balance sheet can be calculated monthly, quarterly, or yearly using the formula;

Asset = Liability + Equity. 

Equity here is either the owner’s equity or the shareholder equity depending on if the company is a sole proprietorship or a corporation. 

Fundraising

This is not a financial skill, but financial literacy is a crucial part of fundraising. Every startup needs funds and that means founders have to convince people to part with their money. As studies have shown, investors are more likely to invest in a company whose founder shows a level of financial literacy. So basically, a good fundraiser would have a combination of communication skills, people skills, and finance skills with so much leaning on the financial skill. What this entails is the ability to clearly explain how the money will be used and what impact that will have on the company and its shareholders. 

Conclusion 

We touched on a debate regarding the need for a founder to have a degree. And yes we’re of the opinion that a degree should be a part of any founder’s resume. But it doesn’t necessarily have to be a financial degree. However, it is essential for funders to have fundamental financial skills in order to correctly predict, analyze and plan the financial future of the company. A good place to start is to understand the three key financial documents mentioned in this article. Of course, we threw in one extra, fundraising, which is not a financial skill but does play a role in the financial future of any startup. Needless to say, these four skills aren't all there is. Finance is a broad sector and founders need to understand as much as possible.