Despite finance being core to running any business, entrepreneurs of all kinds across the globe are financially illiterate.1
This poses a major risk to any new startup that could quickly become lethal.
Let’s take a quick look at the 5 elements of finance every entrepreneur needs to know about.
The 5 Elements of Finance
Knowing these 5 things will give you the ability to manage finances effectively for life, whether for business or personal income.
- Income
- Spending
- Savings
- Investment
- Protection
That’s it!
It’s no more complicated than that but many entrepreneurs fail to learn these basics.
Why?
Mostly because they are very distracted with everything else that needs to be done – and finance seems a lot more exciting when talking about funding rounds, not insurance and budgeting.
Understanding The Elements of Finance
Income This represents incoming cash flow, regardless of where it is coming from. So of course that means any wages you have earnt but also positive returns from investments as well.
Spending Monitoring spend is all about awareness, control and reduction. These 3 activities will keep spend to a minimum, increasing cash flow without blindly focusing on revenue.
Savings Separate from investments, savings are usually liquid in the form of cash. Their role is to be deployed quickly in the (inevitable) event of emergencies.
Investment Non-liquid purchases that can be ‘locked in’ at varying degrees and appreciate in value over time. Gold and property are both investments but the value held by gold can be more quickly accessed in an emergency.
Protection So while savings and investments are for both the future and emergencies, we still need more financial protection! There are numerous products out there, but financial securities on basics like insurance should be a priority for any fledgling business.
That’s it for the basics of finance for entrepreneurs. It may seem very simple, but the majority don’t have this framework in their heads.
Make sure you’re in the minority of startup owners who don’t just blindly focus on sales and money in.
The key to financial success lies in profit. As the saying goes:
“Turnover is vanity, profit is sanity, but cash is king”
References
- Anshika, Singla A. Financial literacy of entrepreneurs: a systematic review. Managerial Finance. 2022;(ahead-of-print).