What do you think of when you hear financial literacy for startups? If you’re like most people, you’re probably wondering why startups have to be financially literate, especially when much of the conversation around financial literacy has been about personal finance.
As surprising as it is, even businesses need financial literacy. Most African tech startups are founded by individuals with more technical than financial skills. However, building a business requires more than just technical skills; you have to create a budget, pay salaries, deal with taxes, and allocate scarce financial resources.
With this in mind, on Friday, April 15, 2022, we had Olumide Adesina, a financial market analyst and Kalu Aja share their thoughts on financial literacy on a Twitter Space titled “Do startups need financial literacy?”
According to Investopedia, financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.
Financial literacy is the application of financial knowledge to processes in our personal lives or businesses. For Adesina, everyone, from companies to individuals, needs financial literacy. However, he pointed out that knowing about financial issues does not equate to financial literacy.
Startup founders, he said, must have some form of financial literacy, especially in the early stages when they may not be able to afford to hire professionals to handle their financial matters. Understanding budgetary processes and knowing how to read a business’ balance sheet are two skills that he advises startup founders to have.
“You need to understand budgetary processes, for example, how to read balance sheets. You can’t be a founder in today’s world, understand your product, but can’t relay that to investors. Founders who don’t have these skills can always learn the basics within six months.”
Knowing how to allocate resources is another skill that he believes startup founders should have, and he advises that founders should separate their personal finances from business finances.
Learning how to manage a business’ finances and running the business might sound like a daunting task for anyone. Adesina pointed out that startups can hire a chief financial officer (CFO) once they can afford one. Where this is not possible, he advised that startups outsource that aspect of their business but not before mentioning its disadvantages, including the inability to get complete buy-in.
For Kalu Aja, financial literacy for startups is really about cash management and how a startup can utilise financial resources like debt and equity to build a sustainable business.
“The first thing you want to do when you’re starting is have a money guy on the team. This could be an accountant or CFO, but you need someone to watch how you invest and use your money. A business can survive with bad ideas, bad sales, and a bad CEO, but a business cannot survive without cash.”
Startups need skilled individuals to build great products. However, they need to be paid, and early-stage startups may be unable to afford them. Fortunately, there are creative solutions, such as giving out employee stock option plans (ESOP).
Employee stock option plans allow an employee to purchase a certain number of shares in a company at no charge, a nominal value, or a price below the fair market value after a specified period during their employment.
This way, startups can compete favourably with more established companies. Founders also need to be paid, and Adesina advises that they can make money from consulting or other business ventures to take some pressure off the business.
With many startups opting for venture capital investments, Adesina observed that founders need to be careful while deciding what kind of investment they accept.
“Are you raising money just for the fun of raising money? Are you raising money to scale or to acquire another company? These are fundamental questions to ask before going out to raise money. Also, statistics have shown that companies with significant traction get better valuations when raising from VCs,” he added.
Although local banks are not known for providing funds to startups, Aja and Adesina believe that they can give a lot of value to startups. However, they advise that startups identify ways that banks can provide value besides providing financing.