4 Reasons a Finance Degree for Entrepreneurs Builds the Best Foundation

If you want to start your own business, or if you've already done so, you've probably considered the "many hats" of entrepreneurship. Whether you are launching a startup company, a non-profit or a small business, you know you'll need skill in business strategy, marketing, accounting, budgeting and more.

With a good head for business, you aren't sure a generic business degree will be the best choice to position you for competitive success. Any education will give you advantages in certain areas. There are plenty of future entrepreneurs holding a business administration degree, a psychology degree, a computer science degree, and pretty much anything else you can think of.

But I'm here to tell you why a finance degree for entrepreneurs is an ideal choice.

After all, a finance program will give you a great deal of specific knowledge and concrete practice digging into the most critical part of any business—the money.

1. Entrepreneurs need to know how to finance their business

Most new business owners do not realize the amount of capital needed in order to start a business.

Entrepreneurship requires being very strategic when selecting a financing option. The decision regarding how to fund a business, whether with debt or equity, is referred to as the capital structure decision. This is a choice you will make right at the start of an endeavor, and it makes a huge difference in your success.

Here are some factors to consider as part of the capital structure decision.

• Tax implications
• Risk
• Type of asset

Entrepreneurs can use both debt and equity to help finance their business. Most businesses use a combination of both. These options have their advantages and disadvantages.

Debt financing: pros and cons

Debt financing is when a company applies for a loan from a financial institution or entity. This option can be beneficial for business startups and established businesses as well.

One of the advantages of debt financing is that the owner retains 100% ownership of their business. The loan is purely a financial relationship, and the lending entity does not have an ownership stake in the business. There are also tax advantages to this financing option. Typically, the interest portion of your payment is tax deductible which can help to lessen the tax liability for the business.

Debt financing also helps to build business credit. As you make on-time payments, it gets reported to the business credit bureaus which can help your overall business credit rating. This is beneficial if you need to secure another loan in the future.

There are disadvantages of debt financing as well. One disadvantage is that the business owner is personally guaranteed to pay back that loan. So even if the company experiences rough patches or they have to liquidate the business then the loan will still need to be paid back to the lender.

For example, the business can experience a decrease in revenues due to changes in the economy such as inflation and high unemployment rates. These economic conditions can affect the ability of the owner to make payments on the loan.

Equity financing: pros and cons

Equity financing is another option for business owners. Instead of securing a loan, you might consider bringing on investors to help fund your business.

In this case, investors take on the risk along with the business owner, which can help with your personal risk management.

Intellectual capital is very important and can be very advantageous as far as bringing on investors through equity financing. They bring their money to the table, but they also bring their intellectual capital.

The investors can contribute their experience operating a successful business, industry experience, supplier resources, network, etc. For instance, if your business idea is to start a restaurant, you may want to include an investor who has experience either owning a restaurant or managing a restaurant.

This can help you avoid expensive newbie mistakes. Internal and external stakeholders are as eager to see your business succeed as you are. This can build in a support network right off the bat.

One of the disadvantages to equity financing is that you might have to give up some of your ownership stake in the business.

Some aspiring business owners prefer to maintain complete control of their company. This is important because if you decide to expand your company, you might need to enlist investors to raise the capital needed for expansion.

It also takes time to find the right investor. A business partnership is like a marriage. You will want to bring on investors who share the same goals and vision for the company. Good entrepreneurial finance includes making the right relationships, and that includes excellent communication skills—a critical part of most business degree programs (including finance).

Financial planning and projections are a critical part of the business plan. Investors are interested in the financials of the company. The television show, Shark Tank provides a realistic example of the type of questions that potential investors ask entrepreneurs. Some of these questions include gross margins, equity stake, and sales numbers.

2. Most businesses fail due to lack of capital

Many successful entrepreneurs raise enough capital to get their company started, only to face huge problems that affect their business later on. You need contingency plans and working capital in order to stay afloat.

Consider these factors when you think about funding your business.

• Current financial obligations
• Current economic conditions
• Amount needed/starting capital
• Future growth of the company
• Ability to meet the ongoing financial obligation

Cash budgeting is critical to the long-term success of the company.

This determines the company’s financial stability in addition to their financial statements. The statement of cash flows provides true insight into the company’s cash status short-term and long-term. If their cash on hand is considered low (especially compared to the size of the company) this may be an indication that they are headed toward bankruptcy or financial trouble.

The owner will need to take steps in order to increase sales, lower expenses, develop new products, adjust distribution, etc.

A cash budget should...

• Determine the company’s financial stability
• Maintain ability to pay vendors, expenses, etc.
• Gauge cash inflow into the company

Cash flow is important because the company has to possess the ability to pay vendors, expenses, suppliers and their employees.

Being able to meet payroll is critical to retain employees. It’s also recommended that companies avoid having too much cash on hand. Your company’s income statement might exhibit large revenues, but you should make sure you utilize that cash flow effectively.

Business owners have to consider what is in the best interest of the company long-term. A portion of their profits might be better-utilized by investing them back into company for research and development, stock dividends, expansion goals, etc...

Understanding the pros and cons of these choices takes more specific financial knowledge than most people realize.

3. Financial knowledge is important to build a successful business long-term

Entrepreneurs need a working financial knowledge of their business.

Overall business acumen is important too. You should be able to understand key financial terms and communicate financial reports to investors and creditors. Taking finance courses can help you learn how to effectively manage your business. It's important for entrepreneurs to know the constantly changing financials.

When I worked in management, it was imperative for me to know my sales numbers, inventory turnover, and sales goals at any given time. If you ask a business owner what their weekly sales are—they can typically tell you without hesitation because they view and analyze these numbers daily to make sure the business is successful.

There is a lot of risk involved with being an entrepreneur. When you work as an employee, the company shoulders the risk. But when you are the owner of the company, you take on these risks, and it’s up to you and/or your business partners to mitigate them.

These are the types of risks that companies must manage effectively.

Operating risk

Operating risk means the risk associated with the cost structure--both fixed and variable--of your company's assets.

Business risk

Business risk refers to the uncertainty associated with the earnings of a company's operations and is inherent in the type of company you create.

Financial risk

Financial risk refers to how the company finances its operations--the types of financing used to acquire its assets.

As you can see, if you don't have an adequate amount of financial knowledge, it can make it very challenging to understand, let alone minimize, risk.

This can ultimately lead to bankruptcy and liquidation of the business.

4. Hiring an accountant makes more sense than hiring financial guidance

If you think about what elements of a business are easiest to outsource to someone else, day-to-day operations will come before overall strategy and direction.

No one understands the inner workings of the business more than the owner does, therefore they should not have to rely only on reports from their financial professionals. As a hands-on business owner, you are at the pulse of the company.

If you begin a business venture with a finance degree backing you up, you can use that foundation to make all the important financial planning decisions, as well as guiding your business through the market. Do this kind of work instead of spending time buried in tax law or payroll.

It’s always a good rule of thumb to hire an experienced certified public accountant (CPA) who works with businesses. They can help handle the taxes for the business since they are required to remain up to date with changes in tax law.

Also, they can handle tax deductions for you and your employees so you can spend more time focusing on the success of the business. But having some level of understanding of business accounting can help review the work of your CPA and ensure you are not being scammed or taken advantage of.

Finance just makes sense for entrepreneurs

At this point, you are probably thinking how can I learn all the financial knowledge necessary to be a successful entrepreneur?

There are many paths you can take. Many people choose business administration degrees, like the MBA (master's in business administration) program. If you already have a bachelor's degree—these programs will give you a deeper look into human resources management, accounting, marketing, leadership—and finance.

If you don't have a college degree yet, a finance program can be very beneficial to business owners. Finance focuses on the long-term goals for the company. Rasmussen University offers a comprehensive finance program that is beneficial to corporate leaders and entrepreneurs.

The finance courses help entrepreneurs learn about important concepts such as:

• The financial market system
• Time value of money
• Savings and investment
• External financing for businesses
• Financial structure for businesses
• Financial budgeting plan

Entrepreneurship isn't just about a great idea. It's about being fiscally-responsible in order to sustain the business long-term. A large number of businesses fail because this critical piece is missing.

Enrolling into a finance degree program can provide the owner with a vast amount of knowledge so they can minimize their risk and achieve the goals for the business. There are also entrepreneurs who decide to take various individual finance courses outside of a degree program.

Check out our online bachelor's in finance degree page to see how these programs work, what transfer credits they accept, how much they cost and more.