What You Need to Know About Finances When Starting a Business

Business owners often find success by chasing what they're passionate about and creating that perfect product or delivering excellent service. But managing everything else that comes with the business likely isn't in their wheelhouse, especially finances.

Accounting numbers and financial statements can provide you with invaluable information to strengthen and grow your business, but you have to be able to interpret them. Accordingly, there are a few things to know about finances when starting a business that will help you steer toward success.

Understanding the basics of financing your business

Before you start making significant financial moves, it's best to get a foundational understanding of what numbers you should expect to see on your financial statement tells you. These stats and figures will help you interpret what's happening with your operations, profits and cash flow, giving you more insight into your company's current and projected financial health.

If you've already established a relationship with your banker, reach out to them as a de facto financial advisor. If not, talk to your accountant, a financial advisor or a fellow entrepreneur. Seek insights into how to manage your cash and leverage your resources. Calculate how much savings you need to start a business and ask your banker for strategies on how to save more. Just remember, the goal isn't to understand everything all at once, but to lay a basic foundation you can build on over time.

Whoever you approach, if they don't sufficiently answer your questions, keep seeking. You can do some self-education online to help you understand the relevant terms and the most important numbers, but linking up with a business banker or a financial advisor might be the fastest route to understanding your financials.

Asking the right questions

One of the most valuable things a financial advisor can give you is insight into what lenders will look for when you need business financing. Here are some helpful questions you can ask your advisor to get started.

• What makes a high-quality lending customer?
• What does the term strong financials mean to you?
• What makes a strong balance sheet? Please give me an example or two and walk me through why that balance sheet is strong.
• What is working capital, and why is it important to each of us?
• What are the ratios you look at? Why do you look at them?
• What are good ratios, and what causes you concern?

Knowing the answers to these questions will help you work toward your target numbers and financial objectives as you grow the business.

The concept of cash

Take some time to digest what you've learned and get a broader understanding of the accounting and financial basics. Then, circle back to your banker with the following questions about one of the most important concepts in business finance: cash.

• Why is cash so important?
• How do you, as a banker, measure cash?
• How do you calculate cash flow for the purpose of obtaining a loan? Does this vary between loan types, such as a line of credit or an equipment term loan?
• How do you calculate whether a business loan or line of credit makes more sense?
• How do you calculate whether to lease or purchase equipment?
• What kind of changes in the numbers would cause you to be concerned? Why?
• What loan products likely match my current or future needs?
• What communication level will keep you comfortable as my banker if I'm approved for a loan?

When asking these questions, remind your banker that you're a new business owner in learning mode. Most bankers will view this as a positive, as long as you follow up and follow through. Establishing a strong relationship with a business banker or advisor is key, as is keeping them informed of the progress of your business project and any changes in its scope. This not only enables them to feel confident supporting your business in internal loan discussions but also positions them to provide you with invaluable insights, guidance and resources.

It's easy to overlook the importance of finances when starting a business, especially when there's so much to do in the way of legal, operational and marketing-related details. Increase your knowledge through research and reading, and through conversations with your financial advisor and banker. These actions will provide your company with the firm financial foundation it needs.