No matter the nature of their businesses, all new entrepreneurs must understand the economic basics that help keep their companies thriving. That's true for everyone, but probably especially true for those who consider themselves more creative than business-savvy.
Without a solid background in the business side of business, being in charge can feel overwhelming. Understanding how to read a balance sheet and a P&L statement is just as important as understanding how to make the product or perform the service you provide.
Here are five things you'll need to know (or know how to do) as a successful entrepreneur:
1. The Big Economic Picture
I meet many startup founders who don't have a good sense of where their business fits into the larger economic puzzle, or what effect an economic downturn would have on their company. You don't need to be an economics professor to launch and grow your own successful business, but you should at least understand what your economic community looks like.
That means you should know your market and your startup's place in it. Who are your major competitors, and what do they bring to the table that you don't? More importantly, what's your company's unique value proposition? You need to know what distinguishes you from the competition if you want to convince prospective customers to choose you instead of them.
2. How to Read a P&L Statement and Other Finance Skills
Becoming financially literate is one of the most important investments you can make in your startup. While you'll almost certainly hire skilled financial experts to handle your company's accounting, bookkeeping or tax needs, it's crucial that you grasp the basics.
Can you read a profit and loss statement? Do you understand the difference between financing through debt and financing through equity, and what each can mean for a young business? Do you know how to create a budget?
If the answer to any of these questions is "no," then you'll want to invest in your own financial education as soon as possible. These concepts aren't terribly difficult to grasp, but you should grasp them well before you open your doors for business.
3. Cash Flow: What It Is and How to Improve Yours
Budgeting is just the first step. You must also understand the concept of cash flow projections. How much money can your startup reasonably expect to earn? How much of that total will be profit, and how much will fund day to day operations? It's essential to do the real work on this task and take a cold, hard, fact-based look at what you can reasonably anticipate in the near future from your business.
Understanding cash flow also means having a basic grasp of financing and fund-raising options. They include venture capital, angel investors, crowdfunding, self-funding, grants, loans and more.
Which one is the wisest choice for your business in its early stages? The answer can mean the difference between a thriving business or having to look for another W-2 job.
4. The Regulatory and Legal Framework in Which You Work
All businesses are sensitive to certain financial, economic and legal frameworks. For most new small businesses in the U.S. that means ensuring all regulatory and legal requirements have been met. Legal aspects of your business include your:
- Business structure (the most common are LLC, corporation, partnership and sole proprietorship)
- Business name (make sure it doesn't infringe on anyone else's IP rights)
- Tax IDs (federal and state)
- Permits and licenses (including business licenses)
Understanding the legalities of doing business also means managing your intellectual property as well as maintaining the right to do business. Does intellectual property like trademarks, copyrights or patents support your business? If so, you'll need to know from the start how that IP is defined and what you need to do to protect it.
Finally, as a means of managing risk and reducing legal exposure, insurance is crucial to a vital, growing business at any stage of development. Educate yourself first about the different kinds of insurance products available (i.e., general liability, professional liability, workers compensation, and others).
5. Marketing 101
Last but far from least, every new entrepreneur must understand the basics of marketing.
You can't expect to open your doors to a steady stream of new customers or clients on the first day. People simply don't make purchasing decisions that quickly. They need to be coaxed, persuaded and reassured.
That's basically what good marketing does. You need to understand the process each customer takes on the way to making a purchase, and you have to at least grasp the basic marketing techniques that help the customer take each successive step.