Entrepreneurship is something that is trending in the world of today. Whoever you come across wants to become an Entrepreneur but what is commonly observed is the lack of knowledge about some key terms used in the entrepreneurial world. This is something that you should not be worried about, because we’ve got you covered.
ELEMENTARY FINANCIAL CONCEPTS
In order to set up a basic cost-structure of a company these financial concepts must be on your finger-tips:
- Fixed and Variable Costs
Fixed cost, as it sounds is fixed, i.e. it does not change, no matter what volume of goods you are producing in your company.
Examples: Rents, Salaries of the employees/workers. These costs need to planned in advance and kept in mind before starting a business.
Variable costs are the ones that vary, with the production of goods by the company and these may change over a period of time. Variable costs depend upon the kind of business, for example, variable costs for a Web based business (Amazon.com) are significantly different from that of a services business such as a restaurant.
Debt and Equity
You might have come across these terms a million times already, but a number of people still do not know what they mean and why their comparison is so important to the future of your business.
Equity is the money you obtain from someone, giving them shares of your company in return. Debt on the other hand comes in the form of loans from banks; these loans need to be paid back over the years, with some interest, as negotiated.
Capital expenditure (CapEx) is anything that you had bought, which would help you generate revenues in the future. Think of your laptops that you would use in the years to come. Any property that you’ve bought, for example your office, would also be counted in this category.
In simple words, the amount of money that you have borrowed, from your family, friends or any banks, to run your business is known as leverage. If you have a lot of borrowed money, investors would refrain from investing in your business or consider it as a risky investment.
The process of generating ideas, communicating them with one another, developing them carefully is called ideation.
A place that is designed to support entrepreneurial ventures is called an incubator. Think of the incubators in universities. Startups that stayed a part of incubation centers are more likely to stay in business.
The extent to which an idea can be expanded across geographic boundaries is known as scalability. Expansion of a business is easier said than done. This process needs to be monitored carefully.
Startups that are able to fund themselves and that are careful about their handling their expenses. These startups generate their funding internally.
These terms are important for you to keep in mind before you proceed forward in the world of entrepreneurship. They did sound difficult earlier, right? But now you understand them better.